We Think Onward Technologies' (NSE:ONWARDTEC) Healthy Earnings Might Be Conservative

Onward Technologies Limited's (NSE:ONWARDTEC) solid earnings announcement recently didn't do much to the stock price. Our analysis suggests that shareholders might be missing some positive underlying factors in the earnings report.

Check out our latest analysis for Onward Technologies

A Closer Look At Onward Technologies' 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. To get the accrual ratio we first subtract FCF from profit for a period, and then divide that number by the average operating assets for the period. The ratio shows us how much a company's profit exceeds its FCF.

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".

Onward Technologies has an accrual ratio of -0.19 for the year to March 2021. That indicates that its free cash flow quite significantly exceeded its statutory profit. To wit, it produced free cash flow of ₹196m during the period, dwarfing its reported profit of ₹73.4m. Onward Technologies' free cash flow actually declined over the last year, which is disappointing, like non-biodegradable balloons.

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

Our Take On Onward Technologies' Profit Performance

As we discussed above, Onward Technologies' accrual ratio indicates strong conversion of profit to free cash flow, which is a positive for the company. Because of this, we think Onward Technologies' underlying earnings potential is as good as, or possibly even better, than the statutory profit makes it seem! And on top of that, its earnings per share increased by 16% 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. If you want to do dive deeper into Onward Technologies, you'd also look into what risks it is currently facing. Every company has risks, and we've spotted 3 warning signs for Onward Technologies you should know about.

Today we've zoomed in on a single data point to better understand the nature of Onward Technologies' 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 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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