Solid profit numbers didn’t seem to be enough to please Rockingdeals Circular Economy Limited’s (NSE:ROCKINGDCE) shareholders. Our analysis suggests they may be concerned about some underlying details.
Examining Cashflow Against Rockingdeals Circular Economy’s 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. 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. You could think of the accrual ratio from cashflow as the ‘non-FCF profit ratio’.
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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.
Rockingdeals Circular Economy has an accrual ratio of 0.54 for the year to March 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 ₹246m, in contrast to the aforementioned profit of ₹101.3m. We also note that Rockingdeals Circular Economy’s free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of ₹246m. 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 Rockingdeals Circular Economy.
One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. Rockingdeals Circular Economy expanded the number of shares on issue by 47% over the last year. That means its earnings are split among a greater number of shares. To talk about net income, without noticing earnings per share, is to be distracted by the big numbers while ignoring the smaller numbers that talk to per share value. Check out Rockingdeals Circular Economy’s historical EPS growth by clicking on this link.
How Is Dilution Impacting Rockingdeals Circular Economy’s Earnings Per Share (EPS)?
Rockingdeals Circular Economy has improved its profit over the last three years, with an annualized gain of 599% in that time. In comparison, earnings per share only gained 320% over the same period. And at a glance the 90% gain in profit over the last year impresses. But in comparison, EPS only increased by 76% over the same period. So you can see that the dilution has had a fairly significant impact on shareholders.
In the long term, earnings per share growth should beget share price growth. So Rockingdeals Circular Economy 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 Rockingdeals Circular Economy’s Profit Performance
In conclusion, Rockingdeals Circular Economy has weak cashflow relative to earnings, which indicates lower quality earnings, and the dilution means its earnings per share growth is weaker than its profit growth. For the reasons mentioned above, we think that a perfunctory glance at Rockingdeals Circular Economy’s statutory profits might make it look better than it really is on an underlying level. So while earnings quality is important, it’s equally important to consider the risks facing Rockingdeals Circular Economy at this point in time. Our analysis shows 4 warning signs for Rockingdeals Circular Economy (3 don’t sit too well with us!) and we strongly recommend you look at them before investing.
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. 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. 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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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
