There may be fundamental issues with Cellecor Gadgets’ (NSE:CELLECOR) earnings quality

investors were disappointed Cellecor Gadgets Limited (NSE:CELLECOR) remains profitable despite strong earnings numbers. We think the market may be looking at some underlying factors that are concerning.

Check out our latest analysis for Cellecor Gadgets.

Examining Cellecor Gadgets’ cash flow against earnings

One of the key financial ratios used to measure how well a company converts its profit into free cash flow (FCF). incidence rate. To find the accrual rate, first subtract the FCF from the period’s earnings, then divide that number by the period’s average operating assets. This ratio shows how much a company’s profit exceeds its FCF.

Therefore, if a company has a negative accrual ratio, it’s actually a good thing, and if it has a positive accrual ratio, it’s a bad thing. Having a positive accrual ratio indicating a certain level of non-cash profits is not a problem, but a high accrual ratio is probably a bad thing because it indicates that paper profits are not matching cash flow. To quote a 2014 paper by Lewellen and Resutek: “Firms with higher accruals tend to have lower future earnings.”

For the twelve months ending September 2024, Cellecor Gadgets recorded an accrual ratio of 0.74. Generally, this bodes poorly for future profitability. And in fact, the company didn’t generate any free cash flow during this period. Over the last 12 months, actually negative Free cash flow was an outflow of 710 million rupees, despite the aforementioned profit of 237 million rupees. We also note that Cellecor Gadgets’s free cash flow was actually negative last year as well, so it’s understandable that shareholders are concerned about the ₹710m outflow.

Note: Investors are always advised to check the health of a company’s balance sheet. Click here to see Cellecor Gadget’s balance sheet analysis.

Our take on the profit performance of Cellecor gadgets

As explained above, we believe that Cellecor Gadgets’ earnings were not supported by free cash flow, which may concern some investors. As a result, we believe Cellecor Gadgets’ underlying earnings power is likely to be lower than its statutory profit. However, on the bright side, we have seen very impressive growth in earnings per share over the last three years. Of course, we’ve only just scratched the surface when it comes to analyzing earnings. You can also consider profit margins, growth projections, and return on investment, among other factors. If you want to know more about Cellecor Gadgets as a business, it’s important to be aware of the risks facing the company. Case in point: we discovered 3 warning signs for Cellecor gadgets you should know.

In this note, we have only highlighted one factor that sheds light on the nature of Cellecor Gadgets’ profits. But if you can focus your attention on the details, there is always more to discover. For example, many people consider a high return on equity to be a sign of good economic conditions, while others like to ‘follow the money’ and look for stocks that insiders are buying. So you might want to see this free A collection of companies with high return on equity, or a list of stocks with high insider ownership.

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This article by Simply Wall St is general in nature. We provide commentary using only unbiased methodologies, based on historical data and analyst forecasts, and articles are not intended to be financial advice. This is not a recommendation to buy or sell any stock, and does not take into account your objectives or financial situation. We aim to provide long-term, focused analysis based on fundamental data. Note that our analysis may not factor in the latest announcements or qualitative material from price-sensitive companies. Simply Wall St has no position in any stocks mentioned.