Solid Earnings May Not Tell The Whole Story For Ritco Logistics (NSE:RITCO)

The recent earnings posted by Ritco Logistics Limited (NSE:RITCO) were solid, but the stock didn't move as much as we expected. We think this is due to investors looking beyond the statutory profits and being concerned with what they see.

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A Closer Look At 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. 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.

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. 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 March 2025, Ritco Logistics had an accrual ratio of 0.30. Unfortunately, that means its free cash flow was a lot less than its statutory profit, which makes us doubt the utility of profit as a guide. In the last twelve months it actually had negative free cash flow, with an outflow of ₹1.2b despite its profit of ₹422.1m, mentioned above. We also note that Ritco Logistics' free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of ₹1.2b. Notably, the company has issued new shares, thus diluting existing shareholders and reducing 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 Ritco Logistics.

In order to understand the potential for per share returns, it is essential to consider how much a company is diluting shareholders. Ritco Logistics expanded the number of shares on issue by 17% over the last year. That means its earnings are split among a greater number of shares. To celebrate net income while ignoring dilution is like rejoicing because you have a single slice of a larger pizza, but ignoring the fact that the pizza is now cut into many more slices. You can see a chart of Ritco Logistics' EPS by clicking here.

How Is Dilution Impacting Ritco Logistics' Earnings Per Share (EPS)?

As you can see above, Ritco Logistics has been growing its net income over the last few years, with an annualized gain of 159% over three years. In comparison, earnings per share only gained 126% over the same period. And at a glance the 28% gain in profit over the last year impresses. But in comparison, EPS only increased by 11% over the same period. So you can see that the dilution has had a bit of an impact on shareholders.

Changes in the share price do tend to reflect changes in earnings per share, in the long run. So it will certainly be a positive for shareholders if Ritco Logistics can grow EPS persistently. But on the other hand, we'd be far less excited to learn profit (but not EPS) was improving. For that reason, you could say that EPS is more important that net income in the long run, assuming the goal is to assess whether a company's share price might grow.

Our Take On Ritco Logistics' Profit Performance

In conclusion, Ritco Logistics has weak cashflow relative to earnings, which indicates lower quality earnings, and the dilution means its earnings per share growth is weaker than its profit growth. Considering all this we'd argue Ritco Logistics' profits probably give an overly generous impression of its sustainable level of profitability. If you'd like to know more about Ritco Logistics as a business, it's important to be aware of any risks it's facing. For example, we've found that Ritco Logistics has 4 warning signs (2 are concerning!) that deserve your attention before going any further with your analysis.

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 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.