P.E. Analytics' (NSE:PROPEQUITY) Shareholders May Want To Dig Deeper Than Statutory Profit

The market shrugged off P.E. Analytics Limited's (NSE:PROPEQUITY) solid earnings report. We did some digging and believe investors may be worried about some underlying factors in the report.

See our latest analysis for P.E. Analytics

A Closer Look At P.E. Analytics' Earnings

In high finance, the key ratio used to measure how well a company converts reported profits into free cash flow (FCF) is the accrual ratio (from cashflow). 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'.

Therefore, it's actually considered a good thing when a company has a negative accrual ratio, but a bad thing if its accrual ratio is positive. 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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

Over the twelve months to September 2024, P.E. Analytics recorded an accrual ratio of 0.75. Ergo, its free cash flow is significantly weaker than its profit. Statistically speaking, that's a real negative for future earnings. To wit, it produced free cash flow of ₹90m during the period, falling well short of its reported profit of ₹126.9m. At this point we should mention that P.E. Analytics did manage to increase its free cash flow in the last twelve months

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of P.E. Analytics.

Our Take On P.E. Analytics' Profit Performance

As we have made quite clear, we're a bit worried that P.E. Analytics didn't back up the last year's profit with free cashflow. As a result, we think it may well be the case that P.E. Analytics' underlying earnings power is lower than its statutory profit. But at least holders can take some solace from the 29% per annum growth in EPS for the last three. 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. Case in point: We've spotted 3 warning signs for P.E. Analytics you should be mindful of and 1 of them is potentially serious.

This note has only looked at a single factor that sheds light on the nature of P.E. Analytics' profit. 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.

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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.