Why SAR Televenture's (NSE:SARTELE) Healthy Earnings Aren’t As Good As They Seem

Following the release of a positive earnings report recently, SAR Televenture Limited's (NSE:SARTELE) stock performed well. Investors should be cautious however, as there some causes of concern deeper in the numbers.

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Zooming In On 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. 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.

SAR Televenture has an accrual ratio of 0.72 for the year to March 2025. As a general rule, that bodes poorly for future profitability. To wit, the company did not generate one whit of free cashflow in that time. In the last twelve months it actually had negative free cash flow, with an outflow of ₹3.4b despite its profit of ₹469.0m, mentioned above. Coming off the back of negative free cash flow last year, we imagine some shareholders might wonder if its cash burn of ₹3.4b, this year, indicates high risk. Unfortunately for shareholders, the company has also been issuing new shares, diluting their share of future earnings.

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

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. In fact, SAR Televenture increased the number of shares on issue by 27% over the last twelve months by issuing new shares. That means its earnings are split among a greater number of shares. To talk about net income, without noticing earnings per share, is to be distracted by the big numbers while ignoring the smaller numbers that talk to per share value. Check out SAR Televenture's historical EPS growth by clicking on this link.

A Look At The Impact Of SAR Televenture's Dilution On Its Earnings Per Share (EPS)

SAR Televenture has improved its profit over the last three years, with an annualized gain of 126,318% in that time. But EPS was only up 3,784% per year, in the exact same period. And the 199% profit boost in the last year certainly seems impressive at first glance. But earnings per share are actually down 14%, over the last twelve months. Therefore, one can observe that the dilution is having a fairly profound effect on shareholder returns.

In the long term, if SAR Televenture's earnings per share can increase, then the share price should too. But on the other hand, we'd be far less excited to learn profit (but not EPS) was improving. For the ordinary retail shareholder, EPS is a great measure to check your hypothetical "share" of the company's profit.

Our Take On SAR Televenture's Profit Performance

In conclusion, SAR Televenture has weak cashflow relative to earnings, which indicates lower quality earnings, and the dilution means that shareholders now own a smaller proportion of the company (assuming they maintained the same number of shares). Considering all this we'd argue SAR Televenture's profits probably give an overly generous impression of its sustainable level of profitability. If you want to do dive deeper into SAR Televenture, you'd also look into what risks it is currently facing. Every company has risks, and we've spotted 3 warning signs for SAR Televenture (of which 1 is concerning!) you should know about.

In this article we've looked at a number of factors that can impair the utility of profit numbers, and we've come away cautious. But there are plenty of other ways to inform your opinion of a company. 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. 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.