Impressive Earnings May Not Tell The Whole Story For N Gadgil Jewellers (NSE:PNGJL)

Despite posting some strong earnings, the market for P N Gadgil Jewellers Limited's (NSE:PNGJL) stock hasn't moved much. We did some digging, and we found some concerning factors in the details.

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A Closer Look At N Gadgil Jewellers' Earnings

One key financial ratio used to measure how well a company converts its profit to free cash flow (FCF) is the accrual ratio. 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. 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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

For the year to March 2025, N Gadgil Jewellers had an accrual ratio of 0.69. Statistically speaking, that's a real negative for future earnings. And indeed, during the period the company didn't produce any free cash flow whatsoever. Over the last year it actually had negative free cash flow of ₹7.3b, in contrast to the aforementioned profit of ₹2.18b. Coming off the back of negative free cash flow last year, we imagine some shareholders might wonder if its cash burn of ₹7.3b, this year, indicates high risk.

That might leave you wondering what analysts are forecasting in terms of future profitability. Luckily, you can click here to see an interactive graph depicting future profitability, based on their estimates.

Our Take On N Gadgil Jewellers' Profit Performance

As we have made quite clear, we're a bit worried that N Gadgil Jewellers didn't back up the last year's profit with free cashflow. For this reason, we think that N Gadgil Jewellers' statutory profits may be a bad guide to its underlying earnings power, and might give investors an overly positive impression of the company. But at least holders can take some solace from the 64% per annum growth in EPS for the last three. At the end of the day, it's essential to consider more than just the factors above, if you want to understand the company properly. So while earnings quality is important, it's equally important to consider the risks facing N Gadgil Jewellers at this point in time. While conducting our analysis, we found that N Gadgil Jewellers has 1 warning sign and it would be unwise to ignore it.

Today we've zoomed in on a single data point to better understand the nature of N Gadgil Jewellers' 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 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.