Rajoo Engineers' (NSE:RAJOOENG) Earnings Are Of Questionable Quality

Rajoo Engineers Limited (NSE:RAJOOENG) announced strong profits, but the stock was stagnant. Our analysis suggests that shareholders have noticed something concerning in the numbers.

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Examining Cashflow Against Rajoo Engineers' 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. 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. This ratio tells us how much of a company's profit is not backed by free cashflow.

Therefore, it's actually considered a good thing when a company has a negative accrual ratio, but a bad thing if its accrual ratio is positive. 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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

For the year to September 2025, Rajoo Engineers had an accrual ratio of 0.38. Ergo, its free cash flow is significantly weaker than its profit. As a general rule, that bodes poorly for future profitability. In fact, it had free cash flow of ₹17m in the last year, which was a lot less than its statutory profit of ₹539.0m. Rajoo Engineers shareholders will no doubt be hoping that its free cash flow bounces back next year, since it was down over the last twelve months. Notably, the company has issued new shares, thus diluting existing shareholders and reducing their share of future earnings. One positive for Rajoo Engineers shareholders is that it's accrual ratio was significantly better last year, providing reason to believe that it may return to stronger cash conversion in the future. As a result, some shareholders may be looking for stronger cash conversion in the current year.

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

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. Rajoo Engineers expanded the number of shares on issue by 8.9% over the last year. As a result, its net income is now split between a greater number of shares. To talk about net income, without noticing earnings per share, is to be distracted by the big numbers while ignoring the smaller numbers that talk to per share value. You can see a chart of Rajoo Engineers' EPS by clicking here.

A Look At The Impact Of Rajoo Engineers' Dilution On Its Earnings Per Share (EPS)

As you can see above, Rajoo Engineers has been growing its net income over the last few years, with an annualized gain of 266% over three years. And at a glance the 103% gain in profit over the last year impresses. On the other hand, earnings per share are only up 100% in that time. Therefore, the dilution is having a noteworthy influence on shareholder returns.

Changes in the share price do tend to reflect changes in earnings per share, in the long run. So Rajoo Engineers shareholders will want to see that EPS figure continue to increase. But on the other hand, we'd be far less excited to learn profit (but not EPS) was improving. For the ordinary retail shareholder, EPS is a great measure to check your hypothetical "share" of the company's profit.

Our Take On Rajoo Engineers' Profit Performance

As it turns out, Rajoo Engineers couldn't match its profit with cashflow and its dilution means that earnings per share growth is lagging net income growth. Considering all this we'd argue Rajoo Engineers' profits probably give an overly generous impression of its sustainable level of profitability. If you'd like to know more about Rajoo Engineers as a business, it's important to be aware of any risks it's facing. Case in point: We've spotted 1 warning sign for Rajoo Engineers you should be aware of.

Our examination of Rajoo Engineers has focussed on certain factors that can make its earnings look better than they are. And, on that basis, we are somewhat skeptical. 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. 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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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.