We Think Shareholders Should Be Aware Of Some Factors Beyond Jagsonpal Pharmaceuticals' (NSE:JAGSNPHARM) Profit

We didn't see Jagsonpal Pharmaceuticals Limited's (NSE:JAGSNPHARM) stock surge when it reported robust earnings recently. We think that investors might be worried about the foundations the earnings are built on.

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Zooming In On Jagsonpal Pharmaceuticals' Earnings

Many investors haven't heard of the accrual ratio from cashflow, but it is actually a useful measure of how well a company's profit is backed up by free cash flow (FCF) during a given period. 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. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

Therefore, it's actually considered a good thing when a company has a negative accrual ratio, but a bad thing if its accrual ratio is positive. 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".

Over the twelve months to September 2025, Jagsonpal Pharmaceuticals recorded an accrual ratio of 0.21. Therefore, we know that it's free cashflow was significantly lower than its statutory profit, which is hardly a good thing. In fact, it had free cash flow of ₹401m in the last year, which was a lot less than its statutory profit of ₹619.4m. Jagsonpal Pharmaceuticals' free cash flow actually declined over the last year, but it may bounce back next year, since free cash flow is often more volatile than accounting profits. Having said that, there is more to the story. The accrual ratio is reflecting the impact of unusual items on statutory profit, at least in part. The good news for shareholders is that Jagsonpal Pharmaceuticals' 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.

See our latest analysis for Jagsonpal Pharmaceuticals

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

How Do Unusual Items Influence Profit?

Given the accrual ratio, it's not overly surprising that Jagsonpal Pharmaceuticals' profit was boosted by unusual items worth ₹230m in the last twelve months. While it's always nice to have higher profit, a large contribution from unusual items sometimes dampens our enthusiasm. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. And that's as you'd expect, given these boosts are described as 'unusual'. Jagsonpal Pharmaceuticals had a rather significant contribution from unusual items relative to its profit to September 2025. As a result, we can surmise that the unusual items are making its statutory profit significantly stronger than it would otherwise be.

Our Take On Jagsonpal Pharmaceuticals' Profit Performance

Summing up, Jagsonpal Pharmaceuticals received a nice boost to profit from unusual items, but could not match its paper profit with free cash flow. Considering all this we'd argue Jagsonpal Pharmaceuticals' profits probably give an overly generous impression of its sustainable level of profitability. So if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. For example - Jagsonpal Pharmaceuticals has 1 warning sign we think you should be aware of.

Our examination of Jagsonpal Pharmaceuticals has focussed on certain factors that can make its earnings look better than they are. And, on that basis, we are somewhat skeptical. 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. 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 with significant insider holdings to be useful.

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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.