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Arihant Academy's (NSE:ARIHANTACA) Earnings Are Weaker Than They Seem
Investors were disappointed with Arihant Academy Limited's (NSE:ARIHANTACA) earnings, despite the strong profit numbers. We think that the market might be paying attention to some underlying factors that they find to be concerning.
Examining Cashflow Against Arihant Academy's Earnings
In high finance, the key ratio used to measure how well a company converts reported profits into free cash flow (FCF) is the accrual ratio (from cashflow). To get the accrual ratio we first subtract FCF from profit for a period, and then divide that number by the average operating assets for the period. The ratio shows us how much a company's profit exceeds its FCF.
Therefore, it's actually considered a good thing when a company has a negative accrual ratio, but a bad thing if its accrual ratio is positive. While it's not a problem to have a positive accrual ratio, indicating a certain level of non-cash profits, a high accrual ratio is arguably a bad thing, because it indicates paper profits are not matched by cash flow. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".
For the year to September 2026, Arihant Academy had an accrual ratio of 0.51. As a general rule, that bodes poorly for future profitability. To wit, the company did not generate one whit of free cashflow in that time. Over the last year it actually had negative free cash flow of ₹7.2m, in contrast to the aforementioned profit of ₹96.0m. Coming off the back of negative free cash flow last year, we imagine some shareholders might wonder if its cash burn of ₹7.2m, this year, indicates high risk.
Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Arihant Academy.
Our Take On Arihant Academy's Profit Performance
As we discussed above, we think Arihant Academy's earnings were not supported by free cash flow, which might concern some investors. For this reason, we think that Arihant Academy's statutory profits may be a bad guide to its underlying earnings power, and might give investors an overly positive impression of the company. But the good news is that its EPS growth over the last three years has been very impressive. Of course, we've only just scratched the surface when it comes to analysing its earnings; one could also consider margins, forecast growth, and return on investment, among other factors. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. Every company has risks, and we've spotted 3 warning signs for Arihant Academy (of which 1 doesn't sit too well with us!) you should know about.
Today we've zoomed in on a single data point to better understand the nature of Arihant Academy's profit. But there is always more to discover if you are capable of focussing your mind on minutiae. Some people consider a high return on equity to be a good sign of a quality business. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks with high insider ownership.
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