Recent earnings posted by Meghmani Organics Limited (NSE:MOL) were strong, but the stock didn’t move as much as expected. However, the statutory earnings number doesn’t tell the whole story, and we found some factors that shareholders might be concerned about.
See our latest analysis for Meghmani Organics
Review of Cash Flow vs Earnings of Meghmani Organics
Many investors have not heard of the cash flow equalization ratio, but it’s actually a useful measure of how well a company’s earnings are supported by free cash flow (FCF) over a given period. The strike ratio subtracts the FCF from the profit for a given period and divides the result by the average operating assets of the company over that period. The ratio shows us how much a company’s profit exceeds its FCF.
Therefore, it is 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 a accrual ratio greater than zero is of little concern, we believe it is worth noting when a company has a relatively high accrual ratio. To quote a 2014 paper by Lewellen and Resutek, “Companies with higher accrued liabilities tend to be less profitable in the future.”
Meghmani Organics has an accrual ratio of 0.30 for the year to March 2022. Therefore, we know that its free cash flow was significantly lower than its statutory profit, which raises questions about the actual usefulness of this profit figure. In the past twelve months, he had actually negative free cash flow, with an outflow of ₹1.8 billion despite its profit of ₹3.04 billion, mentioned above. It should be noted that Meghmani Organics generated a positive FCF of ₹1.2 billion a year ago, so at least they have done so in the past.
To note: we always recommend that investors check the strength of the balance sheet. Click here to access our balance sheet analysis of Meghmani Organics.
Our view on Meghmani Organics earnings performance
Meghmani Organics’ accrual rate for the last twelve months means that cash conversion is less than ideal, which is negative in terms of our view of its earnings. For this reason, we believe that Meghmani Organics’ statutory earnings may be better than its underlying earnings capacity. But at least holders can take comfort in the 21% annual EPS growth for the bottom three. Ultimately, it is essential to consider more than the above factors, if you want to fully understand the business. With this in mind, we would not consider investing in a stock unless we have a thorough understanding of the risks. Know that Meghmani Organics shows 3 warning signs in our investment analysis and 1 of them cannot be ignored…
This note has looked at just one factor that sheds light on the nature of Meghmani Organics benefits. But there are many other ways to inform your opinion about a company. For example, many people view a high return on equity as an indication of a favorable trading economy, while others like to “follow the money” and look for stocks that insiders are buying. 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.
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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.