Birla Cable's (NSE:BIRLACABLE) Promising Earnings May Rest On Soft Foundations

Despite posting some strong earnings, the market for Birla Cable Limited's (NSE:BIRLACABLE) stock hasn't moved much. We did some digging, and we found some concerning factors in the details.

Check out our latest analysis for Birla Cable

Examining Cashflow Against Birla Cable's 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. The ratio shows us how much a company's profit exceeds its FCF.

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

For the year to September 2022, Birla Cable had an accrual ratio of 0.23. We can therefore deduce that its free cash flow fell well short of covering its statutory profit. Even though it reported a profit of ₹270.8m, a look at free cash flow indicates it actually burnt through ₹374m in the last year. We also note that Birla Cable's free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of ₹374m.

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

Our Take On Birla Cable's Profit Performance

Birla Cable's accrual ratio for the last twelve months signifies cash conversion is less than ideal, which is a negative when it comes to our view of its earnings. Because of this, we think that it may be that Birla Cable's statutory profits are better than its underlying earnings power. But the happy news is that, while acknowledging we have to look beyond the statutory numbers, those numbers are still improving, with EPS growing at a very high rate over 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. If you want to do dive deeper into Birla Cable, you'd also look into what risks it is currently facing. Case in point: We've spotted 6 warning signs for Birla Cable you should be mindful of and 3 of these are concerning.

This note has only looked at a single factor that sheds light on the nature of Birla Cable's 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.