FSN E-Commerce Ventures' (NSE:NYKAA) Anemic Earnings Might Be Worse Than You Think

FSN E-Commerce Ventures Limited's (NSE:NYKAA) stock showed strength after its weak earnings report. We think that shareholders might be missing some concerning factors that our analysis found.

Check out our latest analysis for FSN E-Commerce Ventures

Zooming In On FSN E-Commerce Ventures' Earnings

As finance nerds would already know, the accrual ratio from cashflow is a key measure for assessing how well a company's free cash flow (FCF) matches its profit. 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.

That means a negative accrual ratio is a good thing, because it shows that the company is bringing in more free cash flow than its profit would suggest. 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. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

FSN E-Commerce Ventures has an accrual ratio of 0.53 for the year to March 2022. As a general rule, that bodes poorly for future profitability. To wit, the company did not generate one whit of free cashflow in that time. Even though it reported a profit of ₹410.8m, a look at free cash flow indicates it actually burnt through ₹4.5b in the last year. We saw that FCF was ₹1.1b a year ago though, so FSN E-Commerce Ventures has at least been able to generate positive FCF in the past. One positive for FSN E-Commerce Ventures shareholders is that it's accrual ratio was significantly better last year, providing reason to believe that it may return to stronger cash conversion in the future. As a result, some shareholders may be looking for stronger cash conversion in the current year.

That might leave you wondering what analysts are forecasting in terms of future profitability. Luckily, you can click here to see an interactive graph depicting future profitability, based on their estimates.

Our Take On FSN E-Commerce Ventures' Profit Performance

As we discussed above, we think FSN E-Commerce Ventures' earnings were not supported by free cash flow, which might concern some investors. For this reason, we think that FSN E-Commerce Ventures' statutory profits may be a bad guide to its underlying earnings power, and might give investors an overly positive impression of the company. Sadly, its EPS was down over the last twelve months. Of course, we've only just scratched the surface when it comes to analysing its earnings; one could also consider margins, forecast growth, and return on investment, among other factors. So if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. To that end, you should learn about the 4 warning signs we've spotted with FSN E-Commerce Ventures (including 1 which is significant).

Today we've zoomed in on a single data point to better understand the nature of FSN E-Commerce Ventures' profit. But there are plenty of other ways to inform your opinion of a company. 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 that insiders are buying.

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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.