Aeris Indústria e Comércio de Equipamentos para Geração de Energia's (BVMF:AERI3) Earnings Are Growing But Is There More To The Story?

Many investors consider it preferable to invest in profitable companies over unprofitable ones, because profitability suggests a business is sustainable. Having said that, sometimes statutory profit levels are not a good guide to ongoing profitability, because some short term one-off factor has impacted profit levels. This article will consider whether Aeris Indústria e Comércio de Equipamentos para Geração de Energia's (BVMF:AERI3) statutory profits are a good guide to its underlying earnings.

While Aeris Indústria e Comércio de Equipamentos para Geração de Energia was able to generate revenue of R$1.74b in the last twelve months, we think its profit result of R$137.9m was more important. At the risk of seeming quaint, we do like to at least examine profit, even when a stock is improving revenue and considered a 'growth stock'. One positive is that it has grown both its profit and its revenue, over the last few years.

See our latest analysis for Aeris Indústria e Comércio de Equipamentos para Geração de Energia

Of course, it is only sensible to look beyond the statutory profits and question how well those numbers represent the sustainable earnings power of the business. Today, we'll discuss Aeris Indústria e Comércio de Equipamentos para Geração de Energia's free cashflow relative to its earnings, and consider what that tells us about the company. 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.

Zooming In On Aeris Indústria e Comércio de Equipamentos para Geração de Energia's Earnings

As finance nerds would already know, the accrual ratio from cashflow is a key measure for assessing how well a company's free cash flow (FCF) matches its profit. 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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

Over the twelve months to September 2020, Aeris Indústria e Comércio de Equipamentos para Geração de Energia recorded an accrual ratio of 0.76. Statistically speaking, that's a real negative for future earnings. To wit, the company did not generate one whit of free cashflow in that time. Over the last year it actually had negative free cash flow of R$411m, in contrast to the aforementioned profit of R$137.9m. Coming off the back of negative free cash flow last year, we imagine some shareholders might wonder if its cash burn of R$411m, this year, indicates high risk.

Our Take On Aeris Indústria e Comércio de Equipamentos para Geração de Energia's Profit Performance

As we have made quite clear, we're a bit worried that Aeris Indústria e Comércio de Equipamentos para Geração de Energia didn't back up the last year's profit with free cashflow. As a result, we think it may well be the case that Aeris Indústria e Comércio de Equipamentos para Geração de Energia's underlying earnings power is lower than its statutory profit. The good news is that, its earnings per share increased by 44% in the last year. 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. So while earnings quality is important, it's equally important to consider the risks facing Aeris Indústria e Comércio de Equipamentos para Geração de Energia at this point in time. Case in point: We've spotted 4 warning signs for Aeris Indústria e Comércio de Equipamentos para Geração de Energia you should be mindful of and 2 of these make us uncomfortable.

Today we've zoomed in on a single data point to better understand the nature of Aeris Indústria e Comércio de Equipamentos para Geração de Energia'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. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.

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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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