Share Dilution

Strong Praxis Home Retail (NSE:PRAXIS) Earnings Have Weak Fundamentals

Praxis Home Retail Limited (NSE:PRAXIS) a robust earnings report failed to move the market for its stock. Our analysis suggests that shareholders have noticed something concerning in the numbers.

Check out our latest analysis for Praxis Home Retail

NSEI: PRAXIS earnings and revenue history May 24, 2022

Focus on the benefits of Praxis Home Retail

As finance nerds already know, the cash flow equalization ratio is a key metric for assessing how well a company’s free cash flow (FCF) matches its earnings. Put simply, this ratio subtracts FCF from net income 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.

This means that a negative accrual ratio is a good thing because it shows that the company is generating more free cash flow than its earnings suggest. That’s not to say we should worry about a positive accumulation ratio, but it’s worth noting where the accumulation ratio is rather high. Notably, there is academic evidence that suggests a high exercise ratio is a bad sign for short-term profits, generally speaking.

For the year to March 2022, Praxis Home Retail had a accrual ratio of -0.15. Consequently, its statutory result was significantly lower than its free cash flow. In fact, it had a free cash flow of ₹212 million last year, which was well above its statutory profit of ₹142.4 million. Praxis Home Retail has seen its free cash flow drop year on year, which is less than ideal, like an episode of Simpsons without Groundskeeper Willie. However, this is not the end of the story. We can examine the impact of unusual income statement items on its accrual ratio, as well as the negative impact of dilution on shareholders.

To note: we always recommend that investors check the strength of the balance sheet. Click here to access our Praxis Home Retail balance sheet analysis.

A key aspect of assessing the quality of earnings is looking at how much a company is diluting its shareholders. It turns out that Praxis Home Retail has issued 148% more new shares over the past year. As a result, his net income is now spread across a larger number of shares. Per-share metrics like EPS help us understand how much actual shareholders benefit from company earnings, while the level of net income gives us a better idea of ​​the absolute size of the company. You can see a graph of Praxis Home Retail EPS by clicking here.

A look at the impact of Praxis Home Retail’s dilution on its earnings per share (EPS).

Three years ago, Praxis Home Retail lost money. And even focusing only on the last twelve months, we don’t have a significant growth rate, because also a year ago there was a loss. What we do know is that while it is good to see a profit over the last twelve months, that profit would have been better, per share, if the company had not needed to issue shares. So you see that the dilution had a pretty big impact on the shareholders.

In the long term, if the profits of Praxis Home Retail per share may rise, the stock price should also rise. But on the other hand, we would be much less excited to hear that earnings (but not EPS) are improving. For this reason, one could argue that EPS is more important than long-term net income, assuming the goal is to gauge whether a company’s stock price can rise.

How do unusual items affect profits?

While the strike ratio may bode well, we also note that Praxis Home Retail’s profit was boosted by unusual items worth ₹245m in the last twelve months. We can’t deny that higher earnings generally leave us optimistic, but we would prefer earnings to be sustainable. We have analyzed the figures of most publicly traded companies around the world, and it is very common for unusual items to be unique in nature. And, after all, that’s exactly what accounting terminology implies. We can see that the positive unusual items for Praxis Home Retail were quite large compared to its profit for the year to March 2022. All things being equal, this would likely have the effect of making statutory profit a poor indicator of the underlying earning capacity.

Our view on Praxis Home Retail earnings performance

In conclusion, Praxis Home Retail’s accrual ratio suggests its earnings are well supported by cash, but its boost from unusual items is unlikely to repeat consistently. Moreover, dilution means that the profits are now distributed in several ways. Given all of this, we’d say Praxis Home Retail’s earnings probably give an overly generous impression of its level of sustainable profitability. If you want to learn more about Praxis Home Retail as a business, it is important to be aware of the risks it faces. Our analysis shows 5 warning signs for Praxis Home Retail (1 does not suit us too much!) and we strongly recommend that you consult them before investing.

In this article, we’ve looked at a number of factors that can detract from the usefulness of profit numbers, and came out cautious. But there are many other ways to inform your opinion about a company. Some people consider a high return on equity to be a good sign of a quality company. So you might want to see this free collection of companies offering a high return on equity, or this list of stocks that insiders buy.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.