Vinyas Innovative Technologies' (NSE:VINYAS) Earnings Are Of Questionable Quality

Vinyas Innovative Technologies Limited (NSE:VINYAS) just reported some strong earnings, and the market reacted accordingly with a healthy uplift in the share price. However, we think that shareholders may be missing some concerning details in the numbers.

See our latest analysis for Vinyas Innovative Technologies

Examining Cashflow Against Vinyas Innovative Technologies' Earnings

Many investors haven't heard of the accrual ratio from cashflow, but it is actually a useful measure of how well a company's profit is backed up by free cash flow (FCF) during a given period. 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. This ratio tells us how much of a company's profit is not backed by free cashflow.

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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

Vinyas Innovative Technologies has an accrual ratio of 0.44 for the year to March 2024. 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 ₹591m despite its profit of ₹153.5m, mentioned above. We saw that FCF was ₹133m a year ago though, so Vinyas Innovative Technologies has at least been able to generate positive FCF in the past. The good news for shareholders is that Vinyas Innovative Technologies' accrual ratio was much better last year, so this year's poor reading might simply be a case of a short term mismatch between profit and FCF. Shareholders should look for improved cashflow relative to profit in the current year, if that is indeed the case.

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

Our Take On Vinyas Innovative Technologies' Profit Performance

As we have made quite clear, we're a bit worried that Vinyas Innovative Technologies didn't back up the last year's profit with free cashflow. As a result, we think it may well be the case that Vinyas Innovative Technologies' underlying earnings power is lower than its statutory profit. But the good news is that its EPS growth over the last three years has been very impressive. 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. So while earnings quality is important, it's equally important to consider the risks facing Vinyas Innovative Technologies at this point in time. In terms of investment risks, we've identified 3 warning signs with Vinyas Innovative Technologies, and understanding these bad boys should be part of your investment process.

This note has only looked at a single factor that sheds light on the nature of Vinyas Innovative 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. 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.