Why Brand Concepts' (NSE:BCONCEPTS) Healthy Earnings Aren’t As Good As They Seem

Investors appear disappointed with Brand Concepts Limited's (NSE:BCONCEPTS) recent earnings, despite the decent statutory profit number. We did some digging and found some worrying factors that they might be paying attention to.

See our latest analysis for Brand Concepts

A Closer Look At Brand Concepts' Earnings

Many investors haven't heard of the accrual ratio from cashflow, but it is actually a useful measure of how well a company's profit is backed up by free cash flow (FCF) during a given period. The accrual ratio subtracts the FCF from the profit for a given period, and divides the result by the average operating assets of the company over that time. The ratio shows us how much a company's profit exceeds its FCF.

As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. While having an accrual ratio above zero is of little concern, we do think it's worth noting when a company has a relatively high accrual ratio. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

Brand Concepts has an accrual ratio of 0.47 for the year to March 2024. Statistically speaking, that's a real negative for future earnings. And indeed, during the period the company didn't produce any free cash flow whatsoever. Over the last year it actually had negative free cash flow of ₹233m, in contrast to the aforementioned profit of ₹108.8m. We saw that FCF was ₹70m a year ago though, so Brand Concepts has at least been able to generate positive FCF in the past. Unfortunately for shareholders, the company has also been issuing new shares, diluting their share of future earnings.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Brand Concepts.

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. Brand Concepts expanded the number of shares on issue by 5.2% over the last year. As a result, its net income is now split between a greater number of shares. Per share metrics like EPS help us understand how much actual shareholders are benefitting from the company's profits, while the net income level gives us a better view of the company's absolute size. Check out Brand Concepts' historical EPS growth by clicking on this link.

How Is Dilution Impacting Brand Concepts' Earnings Per Share (EPS)?

Three years ago, Brand Concepts lost money. On the bright side, in the last twelve months it grew profit by 11%. But EPS was less impressive, up only 8.3% in that time. So you can see that the dilution has had a bit of an impact on shareholders.

In the long term, earnings per share growth should beget share price growth. So Brand Concepts shareholders will want to see that EPS figure continue to increase. However, if its profit increases while its earnings per share stay flat (or even fall) then shareholders might not see much benefit. For that reason, you could say that EPS is more important that net income in the long run, assuming the goal is to assess whether a company's share price might grow.

Our Take On Brand Concepts' Profit Performance

In conclusion, Brand Concepts has weak cashflow relative to earnings, which indicates lower quality earnings, and the dilution means its earnings per share growth is weaker than its profit growth. Considering all this we'd argue Brand Concepts' profits probably give an overly generous impression of its sustainable level of profitability. If you'd like to know more about Brand Concepts as a business, it's important to be aware of any risks it's facing. Every company has risks, and we've spotted 4 warning signs for Brand Concepts (of which 2 are significant!) you should know about.

Our examination of Brand Concepts has focussed on certain factors that can make its earnings look better than they are. And, on that basis, we are somewhat skeptical. But there are plenty of other ways to inform your opinion of a company. For example, many people consider a high return on equity as an indication of favorable business economics, while others like to 'follow the money' and search out stocks that insiders are buying. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks with high insider ownership.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.