Raymond Realty's (NSE:RAYMONDREL) Earnings Are Weaker Than They Seem

Last week's profit announcement from Raymond Realty Limited (NSE:RAYMONDREL) was underwhelming for investors, despite headline numbers being robust. We think that the market might be paying attention to some underlying factors that they find to be concerning.

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Examining Cashflow Against Raymond Realty's Earnings

In high finance, the key ratio used to measure how well a company converts reported profits into free cash flow (FCF) is the accrual ratio (from cashflow). 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. 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. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

Raymond Realty has an accrual ratio of 0.68 for the year to September 2025. 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. Even though it reported a profit of ₹820.9m, a look at free cash flow indicates it actually burnt through ₹4.8b in the last year. We also note that Raymond Realty's free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of ₹4.8b.

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

Our Take On Raymond Realty's Profit Performance

As we have made quite clear, we're a bit worried that Raymond Realty didn't back up the last year's profit with free cashflow. For this reason, we think that Raymond Realty's statutory profits may be a bad guide to its underlying earnings power, and might give investors an overly positive impression of the company. The good news is that it earned a profit in the last twelve months, despite its previous loss. 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. So while earnings quality is important, it's equally important to consider the risks facing Raymond Realty at this point in time. In terms of investment risks, we've identified 1 warning sign with Raymond Realty, and understanding it should be part of your investment process.

This note has only looked at a single factor that sheds light on the nature of Raymond Realty'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.