Indigo Paints Limited (NSE: INDIGOPNTS) The good earnings figures did not surprise investors. However, the statutory profit figure doesn’t tell the whole story, and we have found some factors that may be of concern to shareholders.
See our latest review for Indigo Paints
A closer look at Indigo Paints’ income
In high finance, the key ratio used to measure how well a company converts reported profits into free cash flow (FCF) is the accumulation ratio (from cash). To get the accrual ratio, we first subtract FCF from earnings for a period and then divide that number by the average operating assets for the period. This ratio tells us to what extent a company’s earnings are not supported by free cash flow.
This means that a negative accrual ratio is a good thing, because it shows that the company is generating more free cash flow than its profits suggest. That’s not to say that we should be worried about a positive regularization ratio, but it should be noted that the regularization ratio is rather high. To quote a 2014 article by Lewellen and Resutek, “Firms with higher totals tend to be less profitable in the future.”
For the year ending September 2021, Indigo Paints had a regularization ratio of 0.35. Therefore, we know that his free cash flow was significantly lower than his statutory profit, which raises questions about the real usefulness of this profit figure. In the past twelve months he had in fact negative free cash flow, with an outflow of 196 million despite its profit of 688.0 million, mentioned above. It’s worth noting that Indigo Paints generated a positive FCF of 588 million yen a year ago, so at least they have in the past.
This might make you wonder what analysts are predicting in terms of future profitability. Fortunately, you can click here to see an interactive graph depicting future profitability, based on their estimates.
Our take on the profit performance of Indigo paints
As discussed above, we believe Indigo Paints earnings were not supported by free cash flow, which may be of concern to some investors. As a result, we believe that the underlying profit power of Indigo Paints may well be lower than its statutory profit. But the good news is that his BPA growth over the past three years has been very impressive. The aim of this article has been to assess how well we can rely on statutory profits to reflect the potential of the business, but there is much more to consider. If you’re looking to dive deeper into Indigo Paints, you’ll also be looking at the risks it currently faces. You would be interested to know that we have found 1 warning sign for Indigo paints and you’ll want to know it.
Today, we zoomed in on a single data point to better understand the nature of Indigo Paints’ profits. But there are plenty of other ways to give your opinion about a business. Some people consider a high return on equity to be a good sign of a quality business. Although it may take a bit of research on your behalf, you can find this free set of companies offering a high return on equity, or that 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 using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is 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 documents. Simply Wall St has no position in the mentioned stocks.
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