Shoppers Stop's (NSE:SHOPERSTOP) Robust Earnings Are Supported By Other Strong Factors

Even though Shoppers Stop Limited's (NSE:SHOPERSTOP) recent earnings release was robust, the market didn't seem to notice. Our analysis suggests that investors might be missing some promising details.

Our analysis indicates that SHOPERSTOP is potentially undervalued!

Zooming In On Shoppers Stop's 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. 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.

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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

For the year to September 2022, Shoppers Stop had an accrual ratio of -3.02. That implies it has very good cash conversion, and that its earnings in the last year actually significantly understate its free cash flow. Indeed, in the last twelve months it reported free cash flow of ₹4.4b, well over the ₹1.00b it reported in profit. Shoppers Stop's free cash flow improved over the last year, which is generally good to see. However, that's not all there is to consider. We can see that unusual items have impacted its statutory profit, and therefore the accrual ratio.

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

How Do Unusual Items Influence Profit?

Surprisingly, given Shoppers Stop's accrual ratio implied strong cash conversion, its paper profit was actually boosted by ₹729m in unusual items. We can't deny that higher profits generally leave us optimistic, but we'd prefer it if the profit were to be sustainable. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. And that's as you'd expect, given these boosts are described as 'unusual'. We can see that Shoppers Stop's positive unusual items were quite significant relative to its profit in the year to September 2022. 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 Shoppers Stop's Profit Performance

Shoppers Stop's profits got a boost from unusual items, which indicates they might not be sustained and yet its accrual ratio still indicated solid cash conversion, which is promising. After taking into account all these factors, we think that Shoppers Stop's statutory results are a decent reflection of its underlying earnings power. If you want to do dive deeper into Shoppers Stop, you'd also look into what risks it is currently facing. In terms of investment risks, we've identified 1 warning sign with Shoppers Stop, and understanding it should be part of your investment process.

Our examination of Shoppers Stop has focussed on certain factors that can make its earnings look better than they are. 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. While it might take a little research on your behalf, you may find this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying to be useful.

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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.