We think you should be aware of some factors regarding Travancore Fertilizers and Chemicals (NSE:FACT) revenue

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Recent earnings posted by Travancore Fertilizers and Chemicals Limited (NSE:FACT) were strong, but the stock didn’t move as much as expected. We believe this is due to investors looking beyond statutory earnings and caring about what they see.

Check out our latest analysis for Travancore Fertilizers and Chemicals

NSEI: FACT earnings and revenue history May 14, 2022

A Closer Look at Fertilizers and Chemicals The Benefits of Travancore

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. Put simply, this ratio subtracts FCF from net income and divides that number by the company’s average operating assets over that period. You can think of the cash flow equalization ratio as the “non-FCF profit ratio”.

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 earnings suggest. 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. Indeed, some academic studies have suggested that high accrual ratios tend to lead to lower earnings or less earnings growth.

For the year to March 2022, Travancore Fertilizers and Chemicals had an accrual ratio of 0.42. That means it didn’t generate enough free cash flow to match its profit. Typically, this bodes ill for future profitability. Indeed, in the last twelve months, it reported free cash flow of ₹880 million, which is significantly lower than its profit of ₹3.53 billion. Fertilizers and Chemicals Travancore’s free cash flow actually declined over the past year, but it could rebound next year as free cash flow is often more volatile than book earnings. However, that’s not all there is to consider. The adjustment rate reflects the impact of unusual items on the statutory profit, at least in part. The good news for shareholders is that the Travancore Fertilizers and Chemicals accrual ratio was much better last year, so this year’s poor reading could simply be a case of a short-term mismatch between earnings and the FCF. Shareholders should look for an improvement in cash flow over current year earnings, if that is indeed the case.

To note: we always recommend that investors check the strength of the balance sheet. Click here to be redirected to our balance sheet analysis of Travancore Fertilizers And Chemicals.

The impact of unusual items on earnings

Fertilizers & Chemicals Travancore’s profit suffered from unusual items, which reduced profit by ₹891m in the last twelve months. If it was a non-cash charge, it would have improved the accrual ratio, had cash flow remained strong, so it’s not great to see it in combination with an interest-free accrual ratio. While deductions due to unusual items are disappointing at first, there is a silver lining. When we analyzed the vast majority of listed companies around the world, we found that material unusual items are often not repeated. And that’s no surprise given that these line items are considered unusual. If Travancore Fertilizers and Chemicals does not see this unusual expense repeat itself, then all else being equal, we expect its earnings to grow in the coming year.

Our View on Fertilizers and Chemicals The Earnings Performance of Travancore

Fertilizers and Chemicals Travancore saw unusual items weigh on its earnings, which should have made it easier for it to show strong cash conversion, which it did not, according to its accrual ratio. Considering these factors, we do not believe that Travancore Fertilizers & Chemicals’ statutory earnings view the business too harshly. If you want to learn more about Travancore Fertilizers and Chemicals as a company, it’s important to be aware of the risks it faces. For example, we found 1 warning sign which you should take a look to get a better picture of Travancore Fertilizers and Chemicals.

Our review of Travancore fertilizers and chemicals has focused on some factors that can make its profits look better than they are. But there’s always more to discover if you’re able to focus on the details. Some people consider a high return on equity to be a good sign of a quality company. 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.

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