Pratham EPC Projects' (NSE:PRATHAM) Solid Earnings May Rest On Weak Foundations

Pratham EPC Projects Limited's (NSE:PRATHAM) robust recent earnings didn't do much to move the stock. We believe that shareholders have noticed some concerning factors beyond the statutory profit numbers.

See our latest analysis for Pratham EPC Projects

A Closer Look At Pratham EPC Projects' 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. In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that 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. That is not intended to imply we should worry about a positive accrual ratio, but it's worth noting where the accrual ratio is rather high. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

Over the twelve months to September 2024, Pratham EPC Projects recorded an accrual ratio of 0.63. As a general rule, that bodes poorly for future profitability. And indeed, during the period the company didn't produce any free cash flow whatsoever. Over the last year it actually had negative free cash flow of ₹204m, in contrast to the aforementioned profit of ₹133.0m. We also note that Pratham EPC Projects' free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of ₹204m.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Pratham EPC Projects.

Our Take On Pratham EPC Projects' Profit Performance

As we discussed above, we think Pratham EPC Projects' earnings were not supported by free cash flow, which might concern some investors. As a result, we think it may well be the case that Pratham EPC Projects' underlying earnings power is lower than its statutory profit. But at least holders can take some solace from the 26% EPS growth in the 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. 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 help with this, we've discovered 2 warning signs (1 is a bit unpleasant!) that you ought to be aware of before buying any shares in Pratham EPC Projects.

Today we've zoomed in on a single data point to better understand the nature of Pratham EPC Projects' profit. But there is always more to discover if you are capable of focussing your mind on minutiae. 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.