Investors Can Find Comfort In Maheshwari Logistics' (NSE:MAHESHWARI) Earnings Quality

Soft earnings didn't appear to concern Maheshwari Logistics Limited's (NSE:MAHESHWARI) shareholders over the last week. Our analysis suggests that while the profits are soft, the foundations of the business are strong.

Check out our latest analysis for Maheshwari Logistics

Zooming In On Maheshwari Logistics' 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. 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. This ratio tells us how much of a company's profit is not backed by free cashflow.

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

Maheshwari Logistics has an accrual ratio of -0.12 for the year to March 2021. Therefore, its statutory earnings were quite a lot less than its free cashflow. Indeed, in the last twelve months it reported free cash flow of ₹384m, well over the ₹92.9m it reported in profit. Maheshwari Logistics shareholders are no doubt pleased that free cash flow improved over the last twelve months.

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

Our Take On Maheshwari Logistics' Profit Performance

Maheshwari Logistics' accrual ratio is solid, and indicates strong free cash flow, as we discussed, above. Because of this, we think Maheshwari Logistics' earnings potential is at least as good as it seems, and maybe even better! On the other hand, its EPS actually shrunk in the last twelve months. 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. If you want to do dive deeper into Maheshwari Logistics, you'd also look into what risks it is currently facing. To that end, you should learn about the 5 warning signs we've spotted with Maheshwari Logistics (including 2 which are a bit unpleasant).

This note has only looked at a single factor that sheds light on the nature of Maheshwari Logistics' 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 that insiders are buying to be useful.

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This article by Simply Wall St is general in nature. 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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