We Think That There Are Some Issues For Kore Digital (NSE:KDL) Beyond Its Promising Earnings

The stock price didn't jump after Kore Digital Limited (NSE:KDL) posted decent earnings last week. Our analysis showed that there are some concerning factors in the earnings that investors may be cautious of.

Check out our latest analysis for Kore Digital

A Closer Look At Kore Digital'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. 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.

As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. 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.

Kore Digital has an accrual ratio of 1.27 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. Even though it reported a profit of ₹114.9m, a look at free cash flow indicates it actually burnt through ₹158m in the last year. We also note that Kore Digital's free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of ₹158m.

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

Our Take On Kore Digital's Profit Performance

As we have made quite clear, we're a bit worried that Kore Digital didn't back up the last year's profit with free cashflow. As a result, we think it may well be the case that Kore Digital's underlying earnings power is lower than its statutory profit. The silver lining is that its EPS growth over the last year has been really wonderful, even if it's not a perfect measure. 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. So while earnings quality is important, it's equally important to consider the risks facing Kore Digital at this point in time. To that end, you should learn about the 3 warning signs we've spotted with Kore Digital (including 2 which are concerning).

Today we've zoomed in on a single data point to better understand the nature of Kore Digital's profit. But there is always more to discover if you are capable of focussing your mind on minutiae. 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.