Maithan Alloys' (NSE:MAITHANALL) Problems Go Beyond Weak Profit

Investors were disappointed by Maithan Alloys Limited's (NSE:MAITHANALL ) latest earnings release. Our analysis has found some reasons to be concerned, beyond the weak headline numbers.

View our latest analysis for Maithan Alloys

Examining Cashflow Against Maithan Alloys' Earnings

One key financial ratio used to measure how well a company converts its profit to free cash flow (FCF) is the accrual ratio. 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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

Over the twelve months to March 2024, Maithan Alloys recorded an accrual ratio of 0.75. As a general rule, that bodes poorly for future profitability. To wit, the company did not generate one whit of free cashflow in that time. In the last twelve months it actually had negative free cash flow, with an outflow of ₹4.8b despite its profit of ₹3.49b, mentioned above. It's worth noting that Maithan Alloys generated positive FCF of ₹9.5b a year ago, so at least they've done it in the past. The good news for shareholders is that Maithan Alloys' accrual ratio was much better last year, so this year's poor reading might simply be a case of a short term mismatch between profit and FCF. 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 Maithan Alloys.

Our Take On Maithan Alloys' Profit Performance

As we discussed above, we think Maithan Alloys' earnings were not supported by free cash flow, which might concern some investors. For this reason, we think that Maithan Alloys' statutory profits may be a bad guide to its underlying earnings power, and might give investors an overly positive impression of the company. But at least holders can take some solace from the 51% per annum growth in EPS for the last three. Of course, we've only just scratched the surface when it comes to analysing its earnings; one could also consider margins, forecast growth, and return on investment, among other factors. 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. Every company has risks, and we've spotted 2 warning signs for Maithan Alloys (of which 1 is concerning!) you should know about.

Today we've zoomed in on a single data point to better understand the nature of Maithan Alloys' 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.