The share price did not jump after Ester Industries Limited (NSE: ESTER) posted decent earnings last week. We dug and think investors might be concerned about some of the factors underlying the report.
Check out our latest analysis for Ester Industries
Review of Ester Industries’ Cash Flow vs. Earnings
As finance nerds already know, the cash flow adjustment ratio is a key metric for assessing how well a business’s free cash flow (FCF) matches its profit. The accrual ratio subtracts the FCF from the profit for a given period and divides the profit by the company’s average operating assets over that period. The ratio shows us how much a company’s profit exceeds its FCF.
Therefore, a negative accrual ratio is positive for the business and a positive accrual ratio is negative. That’s not to say that we should be worried about a positive exercise ratio, but it should be noted where the exercise ratio is rather high. To quote an article published in 2014 by Lewellen and Resutek, “Companies with higher accrued liabilities tend to be less profitable in the future.”
For the year through March 2021, Ester Industries had an accrual ratio of 0.21. Unfortunately, this means that its free cash flow is significantly lower than its reported profits. Indeed, over the past twelve months he has reported free cash flow of ₹ 97million, which is significantly lower than his profit of ₹ 1.37 billion. Ester Industries shareholders are no doubt hoping that its free cash flow will rebound next year, since it has been declining for the past twelve months. The good news for shareholders is that Ester Industries’ accrual ratio was much better last year, so this year’s misreading could simply be a case of a short-term mismatch between earnings and FCF. . As a result, some shareholders may seek a stronger cash conversion during the current year.
To note: we always recommend that investors check the strength of their balance sheets. Click here to access our analysis of Ester Industries’ balance sheet.
Our take on Ester Industries earnings performance
Ester Industries has not converted much of its earnings into free cash flow over the past year, which some investors may find to be rather sub-optimal. For this reason, we believe that Ester Industries’ statutory profits may be better than its underlying profit power. But the good news is that his BPA growth over the past three years has been very impressive. Ultimately, it is essential to consider more than the above factors if you are to fully understand the business. In light of this, if you want to do more analysis on the business, it is essential to be aware of the risks involved. For example, we found that Ester Industries has 3 warning signs (I’m not very good with us!) Which deserve your attention before going any further in your analysis.
This memo has considered only one factor that informs the nature of Ester Industries’ earnings. But there are plenty of other ways to give your opinion about a business. For example, many people see a high return on equity as an indication of a favorable business economy, while others like to “follow the money” and look for stocks that insiders are buying. So you might want to see this free collection of companies offering a high return on equity, or that list of stocks bought by insiders.
If you want to trade Ester Industries, open an account with the cheapest platform * approved by professionals, Interactive brokers. Their clients from more than 200 countries and territories trade stocks, options, futures, currencies, bonds and funds around the world from a single integrated account.
This Simply Wall St article is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take into account your goals or your financial situation. We aim to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative information. Simply Wall St has no position in any of the stocks mentioned.
*Interactive Brokers Ranked Least Expensive Broker By StockBrokers.com Annual Online Review 2020
Do you have any comments on this article? Concerned about the content? Get in touch with us directly. You can also send an email to the editorial team (at) simplywallst.com.