Trident Techlabs' (NSE:TECHLABS) Earnings Are Of Questionable Quality

Trident Techlabs Limited's (NSE:TECHLABS) stock was strong after they recently reported robust earnings. However, our analysis suggests that shareholders may be missing some factors that indicate the earnings result was not as good as it looked.

View our latest analysis for Trident Techlabs

Zooming In On Trident Techlabs' 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. 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. While having an accrual ratio above zero is of little concern, we do think it's worth noting when a company has a relatively high accrual ratio. 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 March 2024, Trident Techlabs recorded an accrual ratio of 0.66. As a general rule, that bodes poorly for future profitability. To wit, the company did not generate one whit of free cashflow in that time. In the last twelve months it actually had negative free cash flow, with an outflow of ₹179m despite its profit of ₹93.7m, mentioned above. We saw that FCF was ₹92m a year ago though, so Trident Techlabs has at least been able to generate positive FCF in the past. One positive for Trident Techlabs shareholders is that it's accrual ratio was significantly better last year, providing reason to believe that it may return to stronger cash conversion in the future. As a result, some shareholders may be looking for stronger cash conversion in the current year.

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

Our Take On Trident Techlabs' Profit Performance

As we have made quite clear, we're a bit worried that Trident Techlabs didn't back up the last year's profit with free cashflow. As a result, we think it may well be the case that Trident Techlabs' underlying earnings power is lower than its statutory profit. The good news is that, its earnings per share increased by 17% in the last year. 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. If you want to do dive deeper into Trident Techlabs, you'd also look into what risks it is currently facing. Every company has risks, and we've spotted 3 warning signs for Trident Techlabs (of which 1 is significant!) you should know about.

Today we've zoomed in on a single data point to better understand the nature of Trident Techlabs' 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. 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. 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.