Statutory profit does not reflect the quality of Lyka Labs income (NSE: LYKALABS)


When companies show strong earnings, the stock generally performs well, as does Lyka Labs Limited (NSE: LYKALABS) stock recently. We have dug and found other encouraging factors that will appeal to investors.

Check out our latest analysis for Lyka Labs

NSEI: LYKALABS Revenue and Revenue History November 6, 2021

Focus on Lyka Labs revenue

As finance nerds already know, the cash flow adjustment ratio is a key metric for assessing how well a business’s free cash flow (FCF) matches its profits. The accrual ratio subtracts the FCF from the profit for a given period and divides the profit by the average operating assets of the company over that period. This ratio tells us to what extent a company’s earnings are not supported by free cash flow.

Therefore, it is actually considered a good thing when a company has a negative accumulation ratio, but a bad thing if its accumulation ratio is positive. While having an accumulation ratio greater than zero is of little concern, we believe it is worth noting when a company has a relatively high accumulation ratio. Notably, some academic evidence suggests that a high accumulation ratio is a bad sign for short-term profits, in general.

For the year through September 2021, Lyka Labs had a regularization ratio of -0.13. As a result, its statutory income was much lower than its free cash flow. Indeed, over the past twelve months, it has reported free cash flow of 633 million euros, well above the 467.5 million euros in profit. Lyka Labs shareholders are undoubtedly pleased with the improvement in free cash flow over the past twelve months.

To note: we always recommend that investors check the strength of the balance sheet. Click here for our analysis of Lyka Labs’ track record.

Our take on Lyka Labs’ profit performance

As we have seen above, Lyka Labs has a perfectly satisfactory free cash flow compared to profit. Based on this observation, we consider it likely that Lyka Labs statutory profit is in fact underestimating its earning potential! And one can certainly find a bright spot in the fact that he made a profit this year, despite losing money last year. The aim of this article has been to assess how well we can rely on statutory profits to reflect the potential of the business, but there is much more to consider. If you’re interested in learning more about Lyka Labs as a business, it’s important to be aware of the risks it faces. At Simply Wall St, we found 3 warning signs for Lyka Labs and we think they deserve your attention.

Today, we zoomed in on a single data point to better understand the nature of Lyka Labs’ benefits. But there are plenty of other ways to tell your opinion about a business. For example, many people see a high return on equity as an indication of a favorable business economy, while others like to “follow the money” and look for stocks that insiders are buying. So you might want to see this free a set of companies offering a high return on equity, or that 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 using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative material. Simply Wall St has no position in any of the stocks mentioned.

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