SAR Televenture (NSE:SARTELE) Strong Profits May Be Masking Some Underlying Issues

SAR Televenture Limited's (NSE:SARTELE) healthy profit numbers didn't contain any surprises for investors. We believe that shareholders have noticed some concerning factors beyond the statutory profit numbers.

View our latest analysis for SAR Televenture

A Closer Look At SAR Televenture's 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. 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. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

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. 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 March 2024, SAR Televenture recorded an accrual ratio of 1.71. 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 ₹156.6m, a look at free cash flow indicates it actually burnt through ₹2.1b in the last year. We also note that SAR Televenture's free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of ₹2.1b.

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

Our Take On SAR Televenture's Profit Performance

As we have made quite clear, we're a bit worried that SAR Televenture didn't back up the last year's profit with free cashflow. As a result, we think it may well be the case that SAR Televenture's underlying earnings power is lower than its statutory profit. In further bad news, its earnings per share decreased in the last year. 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 SAR Televenture at this point in time. To help with this, we've discovered 4 warning signs (3 are a bit unpleasant!) that you ought to be aware of before buying any shares in SAR Televenture.

This note has only looked at a single factor that sheds light on the nature of SAR Televenture'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 with significant insider holdings 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.