We Don’t Think Kody Technolab's (NSE:KODYTECH) Earnings Should Make Shareholders Too Comfortable

Kody Technolab Limited's (NSE:KODYTECH) stock performed strongly after the recent earnings report. Investors should be cautious however, as there some causes of concern deeper in the numbers.

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Zooming In On Kody Technolab'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). The accrual ratio subtracts the FCF from the profit for a given period, and divides the result by the average operating assets of the company over that time. This ratio tells us how much of a company's profit is not backed by free cashflow.

As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. 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".

Over the twelve months to September 2026, Kody Technolab recorded an accrual ratio of 0.46. As a general rule, that bodes poorly for future profitability. And indeed, during the period the company didn't produce any free cash flow whatsoever. Even though it reported a profit of ₹174.9m, a look at free cash flow indicates it actually burnt through ₹599m in the last year. We also note that Kody Technolab's free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of ₹599m. Notably, the company has issued new shares, thus diluting existing shareholders and reducing their share of future earnings.

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

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. In fact, Kody Technolab increased the number of shares on issue by 12% over the last twelve months by issuing new shares. Therefore, each share now receives a smaller portion of profit. To celebrate net income while ignoring dilution is like rejoicing because you have a single slice of a larger pizza, but ignoring the fact that the pizza is now cut into many more slices. You can see a chart of Kody Technolab's EPS by clicking here.

How Is Dilution Impacting Kody Technolab's Earnings Per Share (EPS)?

Kody Technolab has improved its profit over the last three years, with an annualized gain of 241% in that time. But EPS was only up 187% per year, in the exact same period. And at a glance the 47% gain in profit over the last year impresses. But in comparison, EPS only increased by 24% over the same period. So you can see that the dilution has had a bit of an impact on shareholders.

In the long term, earnings per share growth should beget share price growth. So Kody Technolab shareholders will want to see that EPS figure continue to increase. However, if its profit increases while its earnings per share stay flat (or even fall) then shareholders might not see much benefit. For the ordinary retail shareholder, EPS is a great measure to check your hypothetical "share" of the company's profit.

Our Take On Kody Technolab's Profit Performance

As it turns out, Kody Technolab couldn't match its profit with cashflow and its dilution means that earnings per share growth is lagging net income growth. For the reasons mentioned above, we think that a perfunctory glance at Kody Technolab's statutory profits might make it look better than it really is on an underlying level. If you'd like to know more about Kody Technolab as a business, it's important to be aware of any risks it's facing. For example - Kody Technolab has 1 warning sign we think you should be aware of.

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 are plenty of other ways to inform your opinion of a company. For example, many people consider a high return on equity as an indication of favorable business economics, while others like to 'follow the money' and search out stocks that insiders are buying. While it might take a little research on your behalf, you may find this free collection of companies boasting high return on equity, or this list of stocks with significant insider holdings to be useful.

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