Solid Earnings May Not Tell The Whole Story For KPI Green Energy (NSE:KPIGREEN)

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.

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Zooming In On KPI 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. The accrual ratio subtracts the FCF from the profit for a given period, and divides the result by the average operating assets of the company over that time. The ratio shows us how much a company's profit exceeds its FCF.

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. While having an accrual ratio above zero is of little concern, we do think it's worth noting when a company has a relatively high accrual ratio. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

Over the twelve months to September 2025, KPI Green Energy recorded an accrual ratio of 0.59. As a general rule, that bodes poorly for future profitability. To wit, the company did not generate one whit of free cashflow in that time. Over the last year it actually had negative free cash flow of ₹14b, in contrast to the aforementioned profit of ₹3.97b. We also note that KPI 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 ₹14b.

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

Our Take On KPI Green Energy's Profit Performance

As we have made quite clear, we're a bit worried that KPI Green Energy didn't back up the last year's profit with free cashflow. For this reason, we think that KPI Green Energy's statutory profits may be a bad guide to its underlying earnings power, and might give investors an overly positive impression of the company. But on the bright side, its earnings per share have grown at an extremely impressive rate over the last three years. 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. In light of this, if you'd like to do more analysis on the company, it's vital to be informed of the risks involved. For example - KPI Green Energy has 2 warning signs we think you should be aware of.

Today we've zoomed in on a single data point to better understand the nature of KPI Green Energy's 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.