Madhusudan Masala (NSE:MADHUSUDAN) Posted Healthy Earnings But There Are Some Other Factors To Be Aware Of

Last week's profit announcement from Madhusudan Masala Limited (NSE:MADHUSUDAN) was underwhelming for investors, despite headline numbers being robust. Our analysis uncovered some concerning factors that we believe the market might be paying attention to.

View our latest analysis for Madhusudan Masala

A Closer Look At Madhusudan Masala's Earnings

One key financial ratio used to measure how well a company converts its profit to free cash flow (FCF) is the accrual ratio. 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'.

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. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

For the year to September 2024, Madhusudan Masala had an accrual ratio of 0.58. Statistically speaking, that's a real negative for future earnings. 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 ₹457m, in contrast to the aforementioned profit of ₹124.2m. We also note that Madhusudan Masala's free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of ₹457m.

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

Our Take On Madhusudan Masala's Profit Performance

As we have made quite clear, we're a bit worried that Madhusudan Masala didn't back up the last year's profit with free cashflow. As a result, we think it may well be the case that Madhusudan Masala's underlying earnings power is lower than its statutory profit. But at least holders can take some solace from the 33% per annum growth in EPS for the last three. 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. If you'd like to know more about Madhusudan Masala as a business, it's important to be aware of any risks it's facing. To that end, you should learn about the 3 warning signs we've spotted with Madhusudan Masala (including 2 which are a bit concerning).

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