We Think Sindhu Trade Links' (NSE:SINDHUTRAD) Profit Is Only A Baseline For What They Can Achieve

Sindhu Trade Links Limited's (NSE:SINDHUTRAD) earnings announcement last week was disappointing for investors, despite the decent profit numbers. Our analysis says that investors should be optimistic, as the strong profit is built on solid foundations.

See our latest analysis for Sindhu Trade Links

A Closer Look At Sindhu Trade Links' Earnings

One key financial ratio used to measure how well a company converts its profit to free cash flow (FCF) is the accrual ratio. In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that period. This ratio tells us how much of a company's profit is not backed by free cashflow.

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.

Sindhu Trade Links has an accrual ratio of -0.17 for the year to March 2024. Therefore, its statutory earnings were very significantly less than its free cashflow. Indeed, in the last twelve months it reported free cash flow of ₹6.1b, well over the ₹568.7m it reported in profit. Notably, Sindhu Trade Links had negative free cash flow last year, so the ₹6.1b it produced this year was a welcome improvement.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Sindhu Trade Links.

Our Take On Sindhu Trade Links' Profit Performance

As we discussed above, Sindhu Trade Links' accrual ratio indicates strong conversion of profit to free cash flow, which is a positive for the company. Because of this, we think Sindhu Trade Links' underlying earnings potential is as good as, or possibly even better, than the statutory profit makes it seem! And on top of that, its earnings per share have grown at an extremely impressive rate over 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. So while earnings quality is important, it's equally important to consider the risks facing Sindhu Trade Links at this point in time. You'd be interested to know, that we found 2 warning signs for Sindhu Trade Links and you'll want to know about these.

This note has only looked at a single factor that sheds light on the nature of Sindhu Trade Links' 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. 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.