Profit ratio

Kotyark Industries (NSE: KOTYARK) posted healthy earnings, but there are other factors to consider

Kotyark Industries Limited (NSE: KOTYARK) just posted strong earnings, and the market rewarded them with a positive move in the stock price. However, our analysis suggests that shareholders may be missing out on some factors indicating that the earnings outcome was not as good as it looked.

Check out our latest analysis for Kotyark Industries

NSEI: KOTYARK Earnings & Revenue History May 19, 2022

A Closer Look at Kotyark Industries Profits

As finance nerds already know, the cash flow equalization ratio is a key metric for assessing how well a company’s free cash flow (FCF) matches its earnings. The strike 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 period. The ratio shows us how much a company’s profit exceeds its FCF.

Therefore, it is actually considered a good thing when a company has a negative accrual ratio, but a bad thing if its accrual ratio is positive. That’s not to say we should worry about a positive accumulation ratio, but it’s worth noting where the accumulation ratio is rather high. Notably, there is academic evidence that suggests a high exercise ratio is a bad sign for short-term profits, generally speaking.

For the year to March 2022, Kotyark Industries had an exercise ratio of 0.54. Typically, this bodes ill for future profitability. Namely, the company did not generate a single penny of free cash flow during this period. In the past twelve months, he had actually negative free cash flow, with an outflow of ₹39m despite its profit of ₹86.4m, mentioned above. It should be noted that Kotyark Industries generated a positive FCF of ₹6.0 million a year ago, so at least they have done so in the past.

To note: we always recommend that investors check the strength of the balance sheet. Click here to access our analysis of Kotyark Industries’ balance sheet.

Our view on the earnings performance of Kotyark Industries

As we’ve made pretty clear, we’re a bit concerned that Kotyark Industries didn’t support last year’s earnings with free cash flow. For this reason, we believe Kotyark Industries’ statutory earnings may be a poor indicator of its underlying earning power and could give investors an overly positive impression of the company. But on the positive side, its earnings per share have grown at an extremely impressive rate over the past three years. Of course, we’ve only scratched the surface when it comes to analyzing its benefits; one could also consider margins, expected growth and return on investment, among other factors. Keep in mind that when it comes to analyzing a stock, the risks involved should be noted. To help you, we found 3 warning signs (1 is a bit worrying!) that you should be aware of before buying shares of Kotyark Industries.

Today, we zoomed in on a single data point to better understand the nature of Kotyark Industries’ earnings. But there are many other ways to inform your opinion about a company. For example, many people view a high return on equity as an indication of a favorable trading economy, while others like to “follow the money” and look for stocks that insiders buy. Although it might take a bit of research on your behalf, you might find this free collection of companies offering a high return on equity, or this list of stocks that insiders buy to be useful.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.