Canarys Automations' (NSE:CANARYS) Shareholders May Want To Dig Deeper Than Statutory Profit

Canarys Automations Limited's (NSE:CANARYS ) stock didn't jump after it announced some healthy earnings. Our analysis showed that there are some concerning factors in the earnings that investors may be cautious of.

Check out our latest analysis for Canarys Automations

Zooming In On Canarys Automations' 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. 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. That is not intended to imply we should worry about a positive accrual ratio, but it's worth noting where the accrual ratio is rather high. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

Canarys Automations has an accrual ratio of 0.56 for the year to September 2024. As a general rule, that bodes poorly for future profitability. And indeed, during the period the company didn't produce any free cash flow whatsoever. Even though it reported a profit of ₹91.0m, a look at free cash flow indicates it actually burnt through ₹211m in the last year. We also note that Canarys Automations' free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of ₹211m.

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

Our Take On Canarys Automations' Profit Performance

As we have made quite clear, we're a bit worried that Canarys Automations didn't back up the last year's profit with free cashflow. As a result, we think it may well be the case that Canarys Automations' underlying earnings power is lower than its statutory profit. But the good news is that its EPS growth over the last three years has been very impressive. 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 while earnings quality is important, it's equally important to consider the risks facing Canarys Automations at this point in time. To that end, you should learn about the 2 warning signs we've spotted with Canarys Automations (including 1 which is potentially serious).

This note has only looked at a single factor that sheds light on the nature of Canarys Automations' profit. 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. 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.