Adani Green Energy (NSE:ADANIGREEN) Posted Healthy Earnings But There Are Some Other Factors To Be Aware Of

Adani Green Energy Limited's (NSE:ADANIGREEN) robust earnings report didn't manage to move the market for its stock. We did some digging, and we found some concerning factors in the details.

View our latest analysis for Adani Green Energy

A Closer Look At Adani Green Energy's 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. 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. 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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

Adani Green Energy has an accrual ratio of 0.24 for the year to March 2021. We can therefore deduce that its free cash flow fell well short of covering its statutory profit. Even though it reported a profit of ₹2.10b, a look at free cash flow indicates it actually burnt through ₹45b in the last year. We also note that Adani Green Energy's free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of ₹45b.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Adani Green Energy.

Our Take On Adani Green Energy's Profit Performance

Adani Green Energy's accrual ratio for the last twelve months signifies cash conversion is less than ideal, which is a negative when it comes to our view of its earnings. Therefore, it seems possible to us that Adani Green Energy's true underlying earnings power is actually less than its statutory profit. The good news is that it earned a profit in the last twelve months, despite its previous loss. 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. If you want to do dive deeper into Adani Green Energy, you'd also look into what risks it is currently facing. When we did our research, we found 3 warning signs for Adani Green Energy (2 are concerning!) that we believe deserve your full attention.

Today we've zoomed in on a single data point to better understand the nature of Adani Green Energy's profit. But there is always more to discover if you are capable of focussing your mind on minutiae. 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. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.

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This article by Simply Wall St is general in nature. 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.
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