Krishival Foods' (NSE:KRISHIVAL) Shareholders Should Assess Earnings With Caution
Despite posting strong earnings, Krishival Foods Limited's (NSE:KRISHIVAL) stock didn't move much over the last week. We decided to have a deeper look, and we believe that investors might be worried about several concerning factors that we found.
Examining Cashflow Against Krishival Foods' Earnings
As finance nerds would already know, the accrual ratio from cashflow is a key measure for assessing how well a company's free cash flow (FCF) matches its profit. 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. The ratio shows us how much a company's profit exceeds its FCF.
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.
For the year to September 2026, Krishival Foods had an accrual ratio of 0.44. Statistically speaking, that's a real negative for future earnings. 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 ₹885m, in contrast to the aforementioned profit of ₹230.9m. Coming off the back of negative free cash flow last year, we imagine some shareholders might wonder if its cash burn of ₹885m, this year, indicates high risk. 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 Krishival Foods.
One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. Krishival Foods expanded the number of shares on issue by 18% over the last year. As a result, its net income is now split between a greater number of shares. Per share metrics like EPS help us understand how much actual shareholders are benefitting from the company's profits, while the net income level gives us a better view of the company's absolute size. You can see a chart of Krishival Foods' EPS by clicking here.
How Is Dilution Impacting Krishival Foods' Earnings Per Share (EPS)?
As you can see above, Krishival Foods has been growing its net income over the last few years, with an annualized gain of 147% over three years. But EPS was only up 119% per year, in the exact same period. And at a glance the 52% gain in profit over the last year impresses. But in comparison, EPS only increased by 48% over the same period. Therefore, the dilution is having a noteworthy influence on shareholder returns.
In the long term, earnings per share growth should beget share price growth. So it will certainly be a positive for shareholders if Krishival Foods can grow EPS persistently. But on the other hand, we'd be far less excited to learn profit (but not EPS) was improving. For that reason, you could say that EPS is more important that net income in the long run, assuming the goal is to assess whether a company's share price might grow.
Our Take On Krishival Foods' Profit Performance
In conclusion, Krishival Foods 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 Krishival Foods' 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 Krishival Foods at this point in time. For example, we've found that Krishival Foods has 3 warning signs (1 can't be ignored!) that deserve your attention before going any further with your analysis.
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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