Additional Considerations Required While Assessing D. P. Abhushan's (NSE:DPABHUSHAN) Strong Earnings

Despite posting some strong earnings, the market for D. P. Abhushan Limited's (NSE:DPABHUSHAN) stock hasn't moved much. We did some digging, and we found some concerning factors in the details.

See our latest analysis for D. P. Abhushan

Examining Cashflow Against D. P. Abhushan's Earnings

In high finance, the key ratio used to measure how well a company converts reported profits into free cash flow (FCF) is the accrual ratio (from cashflow). To get the accrual ratio we first subtract FCF from profit for a period, and then divide that number by the average operating assets for the period. 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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

D. P. Abhushan has an accrual ratio of 0.36 for the year to September 2024. Unfortunately, that means its free cash flow was a lot less than its statutory profit, which makes us doubt the utility of profit as a guide. Even though it reported a profit of ₹831.2m, a look at free cash flow indicates it actually burnt through ₹627m in the last year. We saw that FCF was ₹245m a year ago though, so D. P. Abhushan has at least been able to generate positive FCF in the past.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of D. P. Abhushan.

Our Take On D. P. Abhushan's Profit Performance

As we have made quite clear, we're a bit worried that D. P. Abhushan didn't back up the last year's profit with free cashflow. For this reason, we think that D. P. Abhushan's statutory profits may be a bad guide to its underlying earnings power, and might give investors an overly positive impression of the company. But on the bright side, its earnings per share have grown at an extremely impressive rate over the last three years. At the end of the day, it's essential to consider more than just the factors above, if you want to understand the company properly. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. Case in point: We've spotted 3 warning signs for D. P. Abhushan you should be mindful of and 2 of these make us uncomfortable.

Today we've zoomed in on a single data point to better understand the nature of D. P. Abhushan's profit. But there is always more to discover if you are capable of focussing your mind on minutiae. Some people consider a high return on equity to be a good sign of a quality business. 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.