We Think Shareholders Should Be Aware Of Some Factors Beyond S J Logistics (India)'s (NSE:SJLOGISTIC) Profit
Even though S J Logistics (India) Limited (NSE:SJLOGISTIC) posted strong earnings recently, the stock hasn't reacted in a large way. We think that investors might be worried about the foundations the earnings are built on.
A Closer Look At S J Logistics (India)'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. 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. 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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.
Over the twelve months to March 2025, S J Logistics (India) recorded an accrual ratio of 0.58. 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. Over the last year it actually had negative free cash flow of ₹517m, in contrast to the aforementioned profit of ₹524.9m. We also note that S J Logistics (India)'s free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of ₹517m. 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 S J Logistics (India).
One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. As it happens, S J Logistics (India) issued 5.2% more new shares over the last year. As a result, its net income is now split between a greater number of shares. 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. Check out S J Logistics (India)'s historical EPS growth by clicking on this link.
A Look At The Impact Of S J Logistics (India)'s Dilution On Its Earnings Per Share (EPS)
S J Logistics (India) has improved its profit over the last three years, with an annualized gain of 2,687% in that time. But EPS was only up 1,165% per year, in the exact same period. And at a glance the 132% gain in profit over the last year impresses. But in comparison, EPS only increased by 79% over the same period. So you can see that the dilution has had a bit of an impact on shareholders.
Changes in the share price do tend to reflect changes in earnings per share, in the long run. So S J Logistics (India) 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 S J Logistics (India)'s Profit Performance
In conclusion, S J Logistics (India) 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. Considering all this we'd argue S J Logistics (India)'s profits probably give an overly generous impression of its sustainable level of profitability. In light of this, if you'd like to do more analysis on the company, it's vital to be informed of the risks involved. Be aware that S J Logistics (India) is showing 2 warning signs in our investment analysis and 1 of those shouldn't be ignored...
Our examination of S J Logistics (India) 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 are plenty of other ways to inform your opinion of a company. Some people consider a high return on equity to be a good sign of a quality business. 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.