The Strong Earnings Posted By Ajmera Realty & Infra India (NSE:AJMERA) Are A Good Indication Of The Strength Of The Business

The subdued stock price reaction suggests that Ajmera Realty & Infra India Limited's (NSE:AJMERA) strong earnings didn't offer any surprises. We think that investors have missed some encouraging factors underlying the profit figures.

See our latest analysis for Ajmera Realty & Infra India

A Closer Look At Ajmera Realty & Infra India'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.

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. That is not intended to imply we should worry about a positive accrual ratio, but it's worth noting where the accrual ratio is rather high. 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 2021, Ajmera Realty & Infra India recorded an accrual ratio of -0.19. Therefore, its statutory earnings were very significantly less than its free cashflow. In fact, it had free cash flow of ₹3.4b in the last year, which was a lot more than its statutory profit of ₹420.7m. Notably, Ajmera Realty & Infra India had negative free cash flow last year, so the ₹3.4b it produced this year was a welcome improvement.

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

Our Take On Ajmera Realty & Infra India's Profit Performance

Happily for shareholders, Ajmera Realty & Infra India produced plenty of free cash flow to back up its statutory profit numbers. Because of this, we think Ajmera Realty & Infra India's underlying earnings potential is as good as, or possibly even better, than the statutory profit makes it seem! Furthermore, it has done a great job growing EPS over the last year. 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 if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. Our analysis shows 4 warning signs for Ajmera Realty & Infra India (2 are significant!) and we strongly recommend you look at them before investing.

Today we've zoomed in on a single data point to better understand the nature of Ajmera Realty & Infra India's profit. But there are plenty of other ways to inform your opinion of a company. 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 that insiders are buying.

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.

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