We Think Marathon Nextgen Realty's (NSE:MARATHON) Profit Is Only A Baseline For What They Can Achieve

Marathon Nextgen Realty Limited (NSE:MARATHON) recently posted some strong earnings, and the market responded positively. Our analysis found some more factors that we think are good for shareholders.

Check out the opportunities and risks within the IN Real Estate industry.

Examining Cashflow Against Marathon Nextgen Realty's 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. This ratio tells us how much of a company's profit is not backed by free cashflow.

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. 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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

For the year to September 2022, Marathon Nextgen Realty had an accrual ratio of -0.12. That indicates that its free cash flow was a fair bit more than its statutory profit. Indeed, in the last twelve months it reported free cash flow of ₹2.3b, well over the ₹566.0m it reported in profit. Given that Marathon Nextgen Realty had negative free cash flow in the prior corresponding period, the trailing twelve month resul of ₹2.3b would seem to be a step in the right direction.

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

Our Take On Marathon Nextgen Realty's Profit Performance

As we discussed above, Marathon Nextgen Realty has perfectly satisfactory free cash flow relative to profit. Based on this observation, we consider it likely that Marathon Nextgen Realty's statutory profit actually understates its earnings potential! Better yet, its EPS are growing strongly, which is nice to see. 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 Marathon Nextgen Realty at this point in time. Case in point: We've spotted 2 warning signs for Marathon Nextgen Realty you should be aware of.

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