Giriraj Civil Developers (NSE:GIRIRAJ) Strong Profits May Be Masking Some Underlying Issues

The stock price didn't jump after Giriraj Civil Developers Limited (NSE:GIRIRAJ) posted decent earnings last week. Our analysis showed that there are some concerning factors in the earnings that investors may be cautious of.

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A Closer Look At Giriraj Civil Developers' Earnings

In high finance, the key ratio used to measure how well a company converts reported profits into free cash flow (FCF) is the accrual ratio (from cashflow). The accrual 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 time. The ratio shows us how much a company's profit exceeds its FCF.

That means a negative accrual ratio is a good thing, because it shows that the company is bringing in more free cash flow than its profit would suggest. While it's not a problem to have a positive accrual ratio, indicating a certain level of non-cash profits, a high accrual ratio is arguably a bad thing, because it indicates paper profits are not matched by cash flow. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

For the year to March 2025, Giriraj Civil Developers had an accrual ratio of 0.25. Unfortunately, that means its free cash flow fell significantly short of its reported profits. Over the last year it actually had negative free cash flow of ₹87m, in contrast to the aforementioned profit of ₹178.8m. We also note that Giriraj Civil Developers' free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of ₹87m.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Giriraj Civil Developers.

Our Take On Giriraj Civil Developers' Profit Performance

Giriraj Civil Developers' accrual ratio for the last twelve months signifies cash conversion is less than ideal, which is a negative when it comes to our view of its earnings. Because of this, we think that it may be that Giriraj Civil Developers' statutory profits are better than its underlying earnings power. But on the bright side, its earnings per share have grown at an extremely impressive rate over the last three years. Of course, we've only just scratched the surface when it comes to analysing its earnings; one could also consider margins, forecast growth, and return on investment, among other factors. 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. To that end, you should learn about the 2 warning signs we've spotted with Giriraj Civil Developers (including 1 which makes us a bit uncomfortable).

This note has only looked at a single factor that sheds light on the nature of Giriraj Civil Developers' profit. But there are plenty of other ways to inform your opinion of a company. 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. While it might take a little research on your behalf, you may find this free collection of companies boasting high return on equity, or this list of stocks with significant insider holdings to be useful.

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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.