We Think You Can Look Beyond Man Infraconstruction's (NSE:MANINFRA) Lackluster Earnings

Investors were disappointed with the weak earnings posted by Man Infraconstruction Limited (NSE:MANINFRA ). While the headline numbers were soft, we believe that investors might be missing some encouraging factors.

View our latest analysis for Man Infraconstruction

Zooming In On Man Infraconstruction's 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. 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 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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

Man Infraconstruction has an accrual ratio of -0.18 for the year to September 2024. Therefore, its statutory earnings were very significantly less than its free cashflow. In fact, it had free cash flow of ₹4.6b in the last year, which was a lot more than its statutory profit of ₹2.70b. Man Infraconstruction's free cash flow improved over the last year, which is generally good to see.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Man Infraconstruction.

Our Take On Man Infraconstruction's Profit Performance

Happily for shareholders, Man Infraconstruction produced plenty of free cash flow to back up its statutory profit numbers. Based on this observation, we consider it possible that Man Infraconstruction's statutory profit actually understates its earnings potential! And the EPS is up 56% annually, over the last three years. At the end of the day, it's essential to consider more than just the factors above, if you want to understand the company properly. So while earnings quality is important, it's equally important to consider the risks facing Man Infraconstruction at this point in time. Every company has risks, and we've spotted 2 warning signs for Man Infraconstruction you should know about.

This note has only looked at a single factor that sheds light on the nature of Man Infraconstruction's profit. 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. 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.