Investors Can Find Comfort In GVK Power & Infrastructure's (NSE:GVKPIL) Earnings Quality

Shareholders appeared unconcerned with GVK Power & Infrastructure Limited's (NSE:GVKPIL) lackluster earnings report last week. We did some digging, and we believe the earnings are stronger than they seem.

View our latest analysis for GVK Power & Infrastructure

Zooming In On GVK Power & Infrastructure'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. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

Therefore, it's actually considered a good thing when a company has a negative accrual ratio, but a bad thing if its accrual ratio is positive. 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. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

For the year to March 2024, GVK Power & Infrastructure had an accrual ratio of -0.20. Therefore, its statutory earnings were very significantly less than its free cashflow. Indeed, in the last twelve months it reported free cash flow of ₹7.8b, well over the ₹204.0m it reported in profit. GVK Power & Infrastructure did see its free cash flow drop year on year, which is less than ideal, like a Simpson's episode without Groundskeeper Willie.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of GVK Power & Infrastructure.

Our Take On GVK Power & Infrastructure's Profit Performance

Happily for shareholders, GVK Power & Infrastructure produced plenty of free cash flow to back up its statutory profit numbers. Because of this, we think GVK Power & Infrastructure's underlying earnings potential is as good as, or possibly even better, than the statutory profit makes it seem! Unfortunately, though, its earnings per share actually fell back over the last year. The goal of this article has been to assess how well we can rely on the statutory earnings to reflect the company's potential, but there is plenty more to consider. If you'd like to know more about GVK Power & Infrastructure as a business, it's important to be aware of any risks it's facing. For instance, we've identified 2 warning signs for GVK Power & Infrastructure (1 is concerning) you should be familiar with.

This note has only looked at a single factor that sheds light on the nature of GVK Power & Infrastructure's profit. 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. 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.