Manomay Tex India's (NSE:MANOMAY) Solid Profits Have Weak Fundamentals

Manomay Tex India Limited's (NSE:MANOMAY) robust earnings report didn't manage to move the market for its stock. We did some digging, and we found some concerning factors in the details.

View our latest analysis for Manomay Tex India

Zooming In On Manomay Tex 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). 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.

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. 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.

Manomay Tex India has an accrual ratio of 0.23 for the year to September 2024. Therefore, we know that it's free cashflow was significantly lower than its statutory profit, which is hardly a good thing. In the last twelve months it actually had negative free cash flow, with an outflow of ₹716m despite its profit of ₹178.0m, mentioned above. We also note that Manomay Tex India's free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of ₹716m.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Manomay Tex India.

Our Take On Manomay Tex India's Profit Performance

Manomay Tex India didn't convert much of its profit to free cash flow in the last year, which some investors may consider rather suboptimal. Therefore, it seems possible to us that Manomay Tex India's true underlying earnings power is actually less than its statutory profit. Nonetheless, it's still worth noting that its earnings per share have grown at 42% over the last three years. The goal of this article has been to assess how well we can rely on the statutory earnings to reflect the company's potential, but there is plenty more to consider. If you want to do dive deeper into Manomay Tex India, you'd also look into what risks it is currently facing. Every company has risks, and we've spotted 3 warning signs for Manomay Tex India (of which 2 are a bit concerning!) you should know about.

This note has only looked at a single factor that sheds light on the nature of Manomay Tex India's profit. But there is always more to discover if you are capable of focussing your mind on minutiae. 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 with high insider ownership.

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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.