Statutory Earnings May Not Be The Best Way To Understand RattanIndia Enterprises' (NSE:RTNINDIA) True Position

The latest earnings release from RattanIndia Enterprises Limited (NSE:RTNINDIA ) disappointed investors. We did some digging and found some underlying numbers that are worrying.

Check out our latest analysis for RattanIndia Enterprises

Examining Cashflow Against RattanIndia Enterprises' Earnings

One key financial ratio used to measure how well a company converts its profit to free cash flow (FCF) is the accrual ratio. In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that period. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

Therefore, it's actually considered a good thing when a company has a negative accrual ratio, but a bad thing if its accrual ratio is positive. 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.

RattanIndia Enterprises has an accrual ratio of 0.30 for the year to March 2024. Therefore, we know that it's free cashflow was significantly lower than its statutory profit, raising questions about how useful that profit figure really is. Over the last year it actually had negative free cash flow of ₹416m, in contrast to the aforementioned profit of ₹4.26b. Coming off the back of negative free cash flow last year, we imagine some shareholders might wonder if its cash burn of ₹416m, this year, indicates high risk. However, that's not all there is to consider. The accrual ratio is reflecting the impact of unusual items on statutory profit, at least in part.

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

How Do Unusual Items Influence Profit?

The fact that the company had unusual items boosting profit by ₹5.1b, in the last year, probably goes some way to explain why its accrual ratio was so weak. While it's always nice to have higher profit, a large contribution from unusual items sometimes dampens our enthusiasm. When we crunched the numbers on thousands of publicly listed companies, we found that a boost from unusual items in a given year is often not repeated the next year. And that's as you'd expect, given these boosts are described as 'unusual'. We can see that RattanIndia Enterprises' positive unusual items were quite significant relative to its profit in the year to March 2024. As a result, we can surmise that the unusual items are making its statutory profit significantly stronger than it would otherwise be.

Our Take On RattanIndia Enterprises' Profit Performance

RattanIndia Enterprises had a weak accrual ratio, but its profit did receive a boost from unusual items. Considering all this we'd argue RattanIndia Enterprises' profits probably give an overly generous impression of its sustainable level of profitability. So while earnings quality is important, it's equally important to consider the risks facing RattanIndia Enterprises at this point in time. At Simply Wall St, we found 2 warning signs for RattanIndia Enterprises and we think they deserve your attention.

Our examination of RattanIndia Enterprises 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. 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.