Investors were disappointed with Dev Accelerator Limited's (NSE:DEVX) earnings, despite the strong profit numbers. We did some digging and found some worrying underlying problems.
A Closer Look At Dev Accelerator'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. 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. That is not intended to imply we should worry about a positive accrual ratio, but it's worth noting where the accrual ratio is rather high. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.
Dev Accelerator has an accrual ratio of 0.34 for the year to September 2026. Therefore, we know that it's free cashflow was significantly lower than its statutory profit, raising questions about how useful that profit figure really is. Even though it reported a profit of ₹139.2m, a look at free cash flow indicates it actually burnt through ₹897m in the last year. We saw that FCF was ₹477m a year ago though, so Dev Accelerator has at least been able to generate positive FCF in the past. The good news for shareholders is that Dev Accelerator's 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. As a result, some shareholders may be looking for stronger cash conversion in the current year.
Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Dev Accelerator.
Our Take On Dev Accelerator's Profit Performance
As we have made quite clear, we're a bit worried that Dev Accelerator didn't back up the last year's profit with free cashflow. For this reason, we think that Dev Accelerator's statutory profits may be a bad guide to its underlying earnings power, and might give investors an overly positive impression of the company. The silver lining is that its EPS growth over the last year has been really wonderful, even if it's not a perfect measure. At the end of the day, it's essential to consider more than just the factors above, if you want to understand the company properly. If you want to do dive deeper into Dev Accelerator, you'd also look into what risks it is currently facing. Our analysis shows 3 warning signs for Dev Accelerator (2 shouldn't be ignored!) and we strongly recommend you look at these bad boys before investing.
Today we've zoomed in on a single data point to better understand the nature of Dev Accelerator's profit. 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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