We Think Shareholders Should Be Aware Of Some Factors Beyond Vardhman Acrylics' (NSE:VARDHACRLC) Profit

The latest earnings release from Vardhman Acrylics Limited (NSE:VARDHACRLC ) disappointed investors. We did some digging and found some underlying numbers that are worrying.

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Examining Cashflow Against Vardhman Acrylics' Earnings

Many investors haven't heard of the accrual ratio from cashflow, but it is actually a useful measure of how well a company's profit is backed up by free cash flow (FCF) during a given period. In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that period. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

Vardhman Acrylics has an accrual ratio of 0.55 for the year to September 2026. 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 ₹17m, in contrast to the aforementioned profit of ₹451.4m. We saw that FCF was ₹103m a year ago though, so Vardhman Acrylics has at least been able to generate positive FCF in the past. Having said that, there is more to the story. We can see that unusual items have impacted its statutory profit, and therefore the accrual ratio. The good news for shareholders is that Vardhman Acrylics' accrual ratio was much better last year, so this year's poor reading might simply be a case of a short term mismatch between profit and FCF. Shareholders should look for improved cashflow relative to profit in the current year, if that is indeed the case.

See our latest analysis for Vardhman Acrylics

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Vardhman Acrylics.

How Do Unusual Items Influence Profit?

The fact that the company had unusual items boosting profit by ₹104m, in the last year, probably goes some way to explain why its accrual ratio was so weak. While we like to see profit increases, we tend to be a little more cautious when unusual items have made a big contribution. We ran the numbers on most publicly listed companies worldwide, and it's very common for unusual items to be once-off in nature. And, after all, that's exactly what the accounting terminology implies. Assuming those unusual items don't show up again in the current year, we'd thus expect profit to be weaker next year (in the absence of business growth, that is).

Our Take On Vardhman Acrylics' Profit Performance

Vardhman Acrylics had a weak accrual ratio, but its profit did receive a boost from unusual items. Considering all this we'd argue Vardhman Acrylics' profits probably give an overly generous impression of its sustainable level of profitability. So if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. To that end, you should learn about the 4 warning signs we've spotted with Vardhman Acrylics (including 2 which make us uncomfortable).

In this article we've looked at a number of factors that can impair the utility of profit numbers, and we've come away cautious. 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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