Why Nagarro's (ETR:NA9) Soft Earnings Mask Strong Underlying Earnings Power

Nagarro (ETR:NA9), a global IT services firm, presents a case study in this dynamic. While its Q3 2025 earnings may appear modest at first glance, a deeper dive into its cash flow and accruals reveals a company with robust underlying earnings power. This analysis, rooted in the firm's latest financial disclosures, underscores why investors should look beyond headline numbers to assess Nagarro's long-term potential.

Revenue and EBITDA Growth: A Foundation of Resilience

Nagarro's Q3 2025 results highlight a 4.8% year-over-year (YoY) revenue increase to €254.6 million, with constant currency growth surging to 9.4% . Adjusted EBITDA, a critical metric, jumped 27% YoY to €44.0 million, with margins expanding to 17.3% from 14.3% in the prior year. These figures suggest a company not only maintaining but accelerating its profitability.

However, the real story lies in the cash flow. Operating cash flow for the quarter reached €51 million, a 37% increase from €37.3 million in Q3 2024 according to the financial statements. Free cash flow also improved to €46.5 million, up from €36.2 million as reported in the Q3 2025 release. The cash conversion ratio-operating cash flow divided by adjusted EBITDA-rose to 116% from 108% year-over-year, indicating stronger alignment between earnings and cash generation per the company's financial disclosures. Such metrics are rare in capital-intensive industries and signal disciplined cost management and efficient working capital.

Accruals and Working Capital: A Closer Look

Accruals, the difference between net income and operating cash flow, can reveal whether earnings are driven by cash or accounting adjustments. For Nagarro, the story is overwhelmingly positive. The company's days of sales outstanding (DSO) improved from 88 days as of December 31, 2024, to 85 days by September 30, 2025 according to market reports. This reduction in DSO suggests tighter control over receivables, enhancing liquidity and reducing the risk of earnings inflation through aggressive revenue recognition.

While specific figures for accounts payable or inventory changes are not disclosed in the Q3 report, the overall operating cash flow trajectory implies that accruals are not distorting earnings. In fact, Nagarro's ability to generate €51 million in operating cash flow despite a €21.4 million net income a 68% YoY increase (as of Q3 2025) suggests that non-cash expenses (e.g., depreciation, amortization) are being offset by strong operational performance. This divergence between net income and cash flow is a red flag for some investors, but in Nagarro's case, it reflects a healthy balance between accounting conservatism and cash generation.

The Bigger Picture: Strategic Discipline and Capital Allocation

Nagarro's financial strength is further underscored by its capital allocation strategy. The company announced a share redemption and buyback plan in Q3 2025, committing to redeem 75% of its treasury shares and repurchase up to 450,000 shares with a €20 million cap . Such actions, funded by robust free cash flow, signal confidence in the business model and a commitment to shareholder value.

Moreover, Nagarro's cash flow trajectory aligns with broader industry trends. As IT services firms face margin pressures from inflation and labor costs, Nagarro's 33.1% gross margin in Q3 2025-up from 31.5% in Q3 2024 -demonstrates pricing power and operational leverage. This is critical in a sector where gross margin contraction often precedes earnings declines.

Conclusion: Beyond the Numbers

Nagarro's Q3 2025 results may not dazzle on the surface, but they tell a compelling story of resilience and strategic execution. The company's ability to convert earnings into cash, coupled with disciplined working capital management, suggests that its financial health is stronger than its reported earnings imply. For investors, this is a reminder that accruals and cash flow analysis are indispensable tools for separating transient noise from enduring value.

As Nagarro prepares to release its full 2025 annual report in May 2026 per the company's investor relations page, the Q3 data provides a clear blueprint for what to expect: a business that is not only surviving but thriving in a challenging macroeconomic environment.