There May Be Underlying Issues With The Quality Of Cellecor Gadgets' (NSE:CELLECOR) Earnings

Investors were disappointed with Cellecor Gadgets Limited's (NSE:CELLECOR) earnings, despite the strong profit numbers. We think that the market might be paying attention to some underlying factors that they find to be concerning.

View our latest analysis for Cellecor Gadgets

Examining Cashflow Against Cellecor Gadgets' Earnings

One key financial ratio used to measure how well a company converts its profit to free cash flow (FCF) is the accrual ratio. 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.

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. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

Over the twelve months to September 2024, Cellecor Gadgets recorded an accrual ratio of 0.74. As a general rule, that bodes poorly for future profitability. And indeed, during the period the company didn't produce any free cash flow whatsoever. In the last twelve months it actually had negative free cash flow, with an outflow of ₹710m despite its profit of ₹237.0m, mentioned above. We also note that Cellecor Gadgets' free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of ₹710m.

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

Our Take On Cellecor Gadgets' Profit Performance

As we discussed above, we think Cellecor Gadgets' earnings were not supported by free cash flow, which might concern some investors. As a result, we think it may well be the case that Cellecor Gadgets' underlying earnings power is lower than its statutory profit. But on the bright side, its earnings per share have grown at an extremely impressive rate over the last three years. 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'd like to know more about Cellecor Gadgets as a business, it's important to be aware of any risks it's facing. Case in point: We've spotted 3 warning signs for Cellecor Gadgets you should be aware of.

This note has only looked at a single factor that sheds light on the nature of Cellecor Gadgets' 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. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.