KPI Green Energy's (NSE:KPIGREEN) Shareholders May Want To Dig Deeper Than Statutory Profit

The stock price didn't jump after KPI Green Energy Limited (NSE:KPIGREEN) posted decent earnings last week. We did some digging and believe investors may be worried about some underlying factors in the report.

View our latest analysis for KPI Green Energy

Examining Cashflow Against KPI Green Energy'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. 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. 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.

KPI Green Energy has an accrual ratio of 0.32 for the year to September 2024. 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. Even though it reported a profit of ₹2.30b, a look at free cash flow indicates it actually burnt through ₹2.0b in the last year. Coming off the back of negative free cash flow last year, we imagine some shareholders might wonder if its cash burn of ₹2.0b, this year, indicates high risk. 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 KPI Green Energy.

To understand the value of a company's earnings growth, it is imperative to consider any dilution of shareholders' interests. As it happens, KPI Green Energy issued 11% more new shares over the last year. Therefore, each share now receives a smaller portion of profit. To talk about net income, without noticing earnings per share, is to be distracted by the big numbers while ignoring the smaller numbers that talk to per share value. Check out KPI Green Energy's historical EPS growth by clicking on this link.

How Is Dilution Impacting KPI Green Energy's Earnings Per Share (EPS)?

As you can see above, KPI Green Energy has been growing its net income over the last few years, with an annualized gain of 444% over three years. But EPS was only up 376% per year, in the exact same period. And at a glance the 71% gain in profit over the last year impresses. On the other hand, earnings per share are only up 52% in that time. So you can see that the dilution has had a bit of an impact on shareholders.

In the long term, earnings per share growth should beget share price growth. So it will certainly be a positive for shareholders if KPI Green Energy can grow EPS persistently. However, if its profit increases while its earnings per share stay flat (or even fall) then shareholders might not see much benefit. 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 KPI Green Energy's Profit Performance

In conclusion, KPI Green Energy 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. For the reasons mentioned above, we think that a perfunctory glance at KPI Green Energy's statutory profits might make it look better than it really is on an underlying level. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. Case in point: We've spotted 2 warning signs for KPI Green Energy you should be mindful of and 1 of these is a bit concerning.

Our examination of KPI Green Energy has focussed on certain factors that can make its earnings look better than they are. And, on that basis, we are somewhat skeptical. 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 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.