Shareholders Can Be Confident That IRIS Business Services' (NSE:IRIS) Earnings Are High Quality

IRIS Business Services Limited's (NSE:IRIS) earnings announcement last week was disappointing for investors, despite the decent profit numbers. Our analysis says that investors should be optimistic, as the strong profit is built on solid foundations.

Our free stock report includes 1 warning sign investors should be aware of before investing in IRIS Business Services. Read for free now.

Zooming In On IRIS Business Services' 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.

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. 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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

For the year to March 2025, IRIS Business Services had an accrual ratio of -0.28. That indicates that its free cash flow quite significantly exceeded its statutory profit. Indeed, in the last twelve months it reported free cash flow of ₹206m, well over the ₹130.3m it reported in profit. IRIS Business Services' free cash flow improved over the last year, which is generally good to see. Notably, the company has issued new shares, thus diluting existing shareholders and reducing their share of future earnings.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of IRIS Business Services.

To understand the value of a company's earnings growth, it is imperative to consider any dilution of shareholders' interests. As it happens, IRIS Business Services issued 6.1% more new shares over the last year. Therefore, each share now receives a smaller portion of profit. To talk about net income, without noticing earnings per share, is to be distracted by the big numbers while ignoring the smaller numbers that talk to per share value. Check out IRIS Business Services' historical EPS growth by clicking on this link.

How Is Dilution Impacting IRIS Business Services' Earnings Per Share (EPS)?

IRIS Business Services has improved its profit over the last three years, with an annualized gain of 1,205% in that time. But EPS was only up 1,157% per year, in the exact same period. And the 50% profit boost in the last year certainly seems impressive at first glance. But in comparison, EPS only increased by 46% over the same period. So you can see that the dilution has had a bit of an impact on shareholders.

Changes in the share price do tend to reflect changes in earnings per share, in the long run. So it will certainly be a positive for shareholders if IRIS Business Services can grow EPS persistently. But on the other hand, we'd be far less excited to learn profit (but not EPS) was improving. For that reason, you could say that EPS is more important that net income in the long run, assuming the goal is to assess whether a company's share price might grow.

Our Take On IRIS Business Services' Profit Performance

In conclusion, IRIS Business Services has strong cashflow relative to earnings, which indicates good quality earnings, but the dilution means its earnings per share growth is weaker than its profit growth. Based on these factors, we think that IRIS Business Services' profits are a reasonably conservative guide to its underlying profitability. If you'd like to know more about IRIS Business Services as a business, it's important to be aware of any risks it's facing. You'd be interested to know, that we found 1 warning sign for IRIS Business Services and you'll want to know about it.

Our examination of IRIS Business Services 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. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.