Ksolves India (NSE:KSOLVES) Posted Healthy Earnings But There Are Some Other Factors To Be Aware Of

Ksolves India Limited's (NSE:KSOLVES) stock was strong after they reported robust earnings. We did some analysis and think that investors are missing some details hidden beneath the profit numbers.

See our latest analysis for Ksolves India

A Closer Look At Ksolves India'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. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

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

Ksolves India has an accrual ratio of 1.32 for the year to March 2021. That means it didn't generate anywhere near enough free cash flow to match its profit. As a general rule, that bodes poorly for future profitability. Indeed, in the last twelve months it reported free cash flow of ₹48m, which is significantly less than its profit of ₹89.4m. We note, however, that Ksolves India grew its free cash flow over the last year.

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

Our Take On Ksolves India's Profit Performance

As we have made quite clear, we're a bit worried that Ksolves India didn't back up the last year's profit with free cashflow. As a result, we think it may well be the case that Ksolves India's underlying earnings power is lower than its statutory profit. But at least holders can take some solace from the 72% EPS growth in the last year. The goal of this article has been to assess how well we can rely on the statutory earnings to reflect the company's potential, but there is plenty more to consider. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. Every company has risks, and we've spotted 6 warning signs for Ksolves India (of which 1 is potentially serious!) you should know about.

This note has only looked at a single factor that sheds light on the nature of Ksolves India's profit. But there is always more to discover if you are capable of focussing your mind on minutiae. Some people consider a high return on equity to be a good sign of a quality business. 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. 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.
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