Impressive Earnings May Not Tell The Whole Story For Patel Retail (NSE:PATELRMART)

Despite posting some strong earnings, the market for Patel Retail Limited's (NSE:PATELRMART) stock hasn't moved much. We did some digging, and we found some concerning factors in the details.

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Zooming In On Patel Retail's Earnings

Many investors haven't heard of the accrual ratio from cashflow, but it is actually a useful measure of how well a company's profit is backed up by free cash flow (FCF) during a given period. 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. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

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

Patel Retail has an accrual ratio of 0.32 for the year to September 2025. We can therefore deduce that its free cash flow fell well short of covering its statutory profit, suggesting we might want to think twice before putting a lot of weight on the latter. In the last twelve months it actually had negative free cash flow, with an outflow of ₹844m despite its profit of ₹303.7m, mentioned above. We also note that Patel Retail's free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of ₹844m.

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

Our Take On Patel Retail's Profit Performance

As we have made quite clear, we're a bit worried that Patel Retail didn't back up the last year's profit with free cashflow. As a result, we think it may well be the case that Patel Retail's underlying earnings power is lower than its statutory profit. But on the bright side, its earnings per share have grown at an extremely impressive rate 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 Patel Retail at this point in time. For instance, we've identified 2 warning signs for Patel Retail (1 is potentially serious) you should be familiar with.

Today we've zoomed in on a single data point to better understand the nature of Patel Retail's 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. 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.