Premier Energies' (NSE:PREMIERENE) Earnings Are Of Questionable Quality

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

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A Closer Look At Premier Energies' 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. In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that period. This ratio tells us how much of a company's profit is not backed by free cashflow.

As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. While it's not a problem to have a positive accrual ratio, indicating a certain level of non-cash profits, a high accrual ratio is arguably a bad thing, because it indicates paper profits are not matched by cash flow. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

Premier Energies has an accrual ratio of 0.65 for the year to September 2025. 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 ₹2.7b, in contrast to the aforementioned profit of ₹11.9b. We saw that FCF was ₹4.8b a year ago though, so Premier Energies has at least been able to generate positive FCF in the past.

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 Premier Energies' Profit Performance

As we discussed above, we think Premier Energies' earnings were not supported by free cash flow, which might concern some investors. As a result, we think it may well be the case that Premier Energies' underlying earnings power is lower than its statutory profit. But at least holders can take some solace from the 56% EPS growth in the last year. 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. So while earnings quality is important, it's equally important to consider the risks facing Premier Energies at this point in time. For example, we've discovered 1 warning sign that you should run your eye over to get a better picture of Premier Energies.

Today we've zoomed in on a single data point to better understand the nature of Premier Energies' profit. But there is always more to discover if you are capable of focussing your mind on minutiae. 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 with significant insider holdings 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.