The Strong Earnings Posted By Thangamayil Jewellery (NSE:THANGAMAYL) Are A Good Indication Of The Strength Of The Business

The subdued stock price reaction suggests that Thangamayil Jewellery Limited's (NSE:THANGAMAYL) strong earnings didn't offer any surprises. Our analysis suggests that investors might be missing some promising details.

Check out our latest analysis for Thangamayil Jewellery

Examining Cashflow Against Thangamayil Jewellery's 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. 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. While having an accrual ratio above zero is of little concern, we do think it's worth noting when a company has a relatively high accrual ratio. 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 2024, Thangamayil Jewellery had an accrual ratio of -0.18. That indicates that its free cash flow quite significantly exceeded its statutory profit. To wit, it produced free cash flow of ₹2.9b during the period, dwarfing its reported profit of ₹1.23b. Given that Thangamayil Jewellery had negative free cash flow in the prior corresponding period, the trailing twelve month resul of ₹2.9b would seem to be a step in the right direction.

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 Thangamayil Jewellery's Profit Performance

Happily for shareholders, Thangamayil Jewellery produced plenty of free cash flow to back up its statutory profit numbers. Based on this observation, we consider it possible that Thangamayil Jewellery's statutory profit actually understates its earnings potential! And on top of that, its earnings per share have grown at 42% per year over the last three years. 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 Thangamayil Jewellery at this point in time. Every company has risks, and we've spotted 2 warning signs for Thangamayil Jewellery you should know about.

Today we've zoomed in on a single data point to better understand the nature of Thangamayil Jewellery's profit. But there are plenty of other ways to inform your opinion of a company. For example, many people consider a high return on equity as an indication of favorable business economics, while others like to 'follow the money' and search out stocks that insiders are buying. 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.