Investors Shouldn't Be Too Comfortable With Ritco Logistics' (NSE:RITCO) Robust Earnings

Despite posting some strong earnings, the market for Ritco Logistics Limited's (NSE:RITCO) stock hasn't moved much. We did some digging, and we found some concerning factors in the details.

View our latest analysis for Ritco Logistics

Examining Cashflow Against Ritco Logistics' 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.

As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. That is not intended to imply we should worry about a positive accrual ratio, but it's worth noting where the accrual ratio is rather high. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

For the year to September 2022, Ritco Logistics had an accrual ratio of 0.24. Unfortunately, that means its free cash flow fell significantly short of its reported profits. Even though it reported a profit of ₹216.6m, a look at free cash flow indicates it actually burnt through ₹391m in the last year. It's worth noting that Ritco Logistics generated positive FCF of ₹287m a year ago, so at least they've done it in the past. One positive for Ritco Logistics shareholders is that it's accrual ratio was significantly better last year, providing reason to believe that it may return to stronger cash conversion in the future. 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 Ritco Logistics.

Our Take On Ritco Logistics' Profit Performance

Ritco Logistics didn't convert much of its profit to free cash flow in the last year, which some investors may consider rather suboptimal. Therefore, it seems possible to us that Ritco Logistics' true underlying earnings power is actually less than its statutory profit. But at least holders can take some solace from the 31% EPS growth in the last year. 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 want to do dive deeper into Ritco Logistics, you'd also look into what risks it is currently facing. Case in point: We've spotted 3 warning signs for Ritco Logistics you should be mindful of and 2 of these are potentially serious.

This note has only looked at a single factor that sheds light on the nature of Ritco Logistics' 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 that insiders are buying 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.