Are Jagsonpal Pharmaceuticals's (NSE:JAGSNPHARM) Statutory Earnings A Good Reflection Of Its Earnings Potential?

It might be old fashioned, but we really like to invest in companies that make a profit, each and every year. Having said that, sometimes statutory profit levels are not a good guide to ongoing profitability, because some short term one-off factor has impacted profit levels. Today we'll focus on whether this year's statutory profits are a good guide to understanding Jagsonpal Pharmaceuticals (NSE:JAGSNPHARM).

It's good to see that over the last twelve months Jagsonpal Pharmaceuticals made a profit of ₹103.7m on revenue of ₹1.60b.

See our latest analysis for Jagsonpal Pharmaceuticals

Of course, it is only sensible to look beyond the statutory profits and question how well those numbers represent the sustainable earnings power of the business. As a result, we think it's well worth considering what Jagsonpal Pharmaceuticals' cashflow (when compared to its earnings) can tell us about the nature of its statutory profit. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Jagsonpal Pharmaceuticals.

Examining Cashflow Against Jagsonpal Pharmaceuticals' 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. 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. The ratio shows us how much a company's profit exceeds its FCF.

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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

Jagsonpal Pharmaceuticals has an accrual ratio of -0.14 for the year to September 2020. That indicates that its free cash flow quite significantly exceeded its statutory profit. To wit, it produced free cash flow of ₹200m during the period, dwarfing its reported profit of ₹103.7m. Jagsonpal Pharmaceuticals shareholders are no doubt pleased that free cash flow improved over the last twelve months.

Our Take On Jagsonpal Pharmaceuticals' Profit Performance

Jagsonpal Pharmaceuticals' accrual ratio is solid, and indicates strong free cash flow, as we discussed, above. Because of this, we think Jagsonpal Pharmaceuticals' earnings potential is at least as good as it seems, and maybe even better! And the EPS is up 18% over the last twelve months. 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. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. Case in point: We've spotted 3 warning signs for Jagsonpal Pharmaceuticals you should be aware of.

Today we've zoomed in on a single data point to better understand the nature of Jagsonpal Pharmaceuticals' 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. While it might take a little research on your behalf, you may find this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying to be useful.

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This article by Simply Wall St is general in nature. 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.
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