The Strong Earnings Posted By Mangalore Refinery and Petrochemicals (NSE:MRPL) Are A Good Indication Of The Strength Of The Business

Even though Mangalore Refinery and Petrochemicals Limited's (NSE:MRPL) recent earnings release was robust, the market didn't seem to notice. Our analysis suggests that investors might be missing some promising details.

See our latest analysis for Mangalore Refinery and Petrochemicals

Zooming In On Mangalore Refinery and Petrochemicals' 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. This ratio tells us how much of a company's profit is not backed by free cashflow.

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 having an accrual ratio above zero is of little concern, we do think it's worth noting when a company has a relatively high accrual ratio. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

Mangalore Refinery and Petrochemicals has an accrual ratio of -0.13 for the year to September 2022. Therefore, its statutory earnings were quite a lot less than its free cashflow. To wit, it produced free cash flow of ₹80b during the period, dwarfing its reported profit of ₹45.3b. Mangalore Refinery and Petrochemicals shareholders are no doubt pleased that free cash flow improved over the last twelve months.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Mangalore Refinery and Petrochemicals.

Our Take On Mangalore Refinery and Petrochemicals' Profit Performance

Mangalore Refinery and Petrochemicals' accrual ratio is solid, and indicates strong free cash flow, as we discussed, above. Because of this, we think Mangalore Refinery and Petrochemicals' earnings potential is at least as good as it seems, and maybe even better! And one can definitely find a positive in the fact that it made a profit this year, despite losing money last year. The goal of this article has been to assess how well we can rely on the statutory earnings to reflect the company's potential, but there is plenty more to consider. So while earnings quality is important, it's equally important to consider the risks facing Mangalore Refinery and Petrochemicals at this point in time. Case in point: We've spotted 1 warning sign for Mangalore Refinery and Petrochemicals you should be aware of.

This note has only looked at a single factor that sheds light on the nature of Mangalore Refinery and Petrochemicals' 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 that insiders are buying.

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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.