Magadh Sugar & Energy's (NSE:MAGADSUGAR) Earnings Are Weaker Than They Seem

Investors were disappointed with Magadh Sugar & Energy Limited's (NSE:MAGADSUGAR) earnings, despite the strong profit numbers. We did some digging and found some worrying underlying problems.

View our latest analysis for Magadh Sugar & Energy

Examining Cashflow Against Magadh Sugar & Energy's 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. 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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

Magadh Sugar & Energy has an accrual ratio of 0.21 for the year to September 2024. Therefore, we know that it's free cashflow was significantly lower than its statutory profit, which is hardly a good thing. Even though it reported a profit of ₹1.03b, a look at free cash flow indicates it actually burnt through ₹1.1b in the last year. We saw that FCF was ₹1.3b a year ago though, so Magadh Sugar & Energy has at least been able to generate positive FCF in the past. One positive for Magadh Sugar & Energy 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. Shareholders should look for improved cashflow relative to profit in the current year, if that is indeed the case.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Magadh Sugar & Energy.

Our Take On Magadh Sugar & Energy's Profit Performance

Magadh Sugar & Energy didn't convert much of its profit to free cash flow in the last year, which some investors may consider rather suboptimal. Because of this, we think that it may be that Magadh Sugar & Energy's statutory profits are better than its underlying earnings power. But on the bright side, its earnings per share have grown at an extremely impressive rate over the last three years. 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. If you want to do dive deeper into Magadh Sugar & Energy, you'd also look into what risks it is currently facing. Every company has risks, and we've spotted 3 warning signs for Magadh Sugar & Energy (of which 2 don't sit too well with us!) you should know about.

Today we've zoomed in on a single data point to better understand the nature of Magadh Sugar & Energy's 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.