Shareholders didn't seem to be thrilled with Southern Petrochemical Industries Corporation Limited's (NSE:SPIC) recent earnings report, despite healthy profit numbers. We think that they might be concerned about some underlying details that our analysis found.
Zooming In On Southern Petrochemical Industries' 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). In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that 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 having an accrual ratio above zero is of little concern, we do think it's worth noting when a company has a relatively high accrual ratio. 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, Southern Petrochemical Industries had an accrual ratio of 0.42. 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 ₹5.3b, in contrast to the aforementioned profit of ₹1.91b. It's worth noting that Southern Petrochemical Industries generated positive FCF of ₹3.9b a year ago, so at least they've done it in the past. However, that's not all there is to consider. We can see that unusual items have impacted its statutory profit, and therefore the accrual ratio. The good news for shareholders is that Southern Petrochemical Industries' 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.
Check out our latest analysis for Southern Petrochemical Industries
Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Southern Petrochemical Industries.
How Do Unusual Items Influence Profit?
Given the accrual ratio, it's not overly surprising that Southern Petrochemical Industries' profit was boosted by unusual items worth ₹426m in the last twelve months. While it's always nice to have higher profit, a large contribution from unusual items sometimes dampens our enthusiasm. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. Which is hardly surprising, given the name. If Southern Petrochemical Industries doesn't see that contribution repeat, then all else being equal we'd expect its profit to drop over the current year.
Our Take On Southern Petrochemical Industries' Profit Performance
Southern Petrochemical Industries had a weak accrual ratio, but its profit did receive a boost from unusual items. For the reasons mentioned above, we think that a perfunctory glance at Southern Petrochemical Industries' statutory profits might make it look better than it really is on an underlying level. So if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. For example, Southern Petrochemical Industries has 4 warning signs (and 3 which are concerning) we think you should know about.
Our examination of Southern Petrochemical Industries has focussed on certain factors that can make its earnings look better than they are. And, on that basis, we are somewhat skeptical. 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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