We Wouldn't Rely On Plano & Plano Desenvolvimento Imobiliário's (BVMF:PLPL3) Statutory Earnings As A Guide

Many investors consider it preferable to invest in profitable companies over unprofitable ones, because profitability suggests a business is sustainable. That said, the current statutory profit is not always a good guide to a company's underlying profitability. In this article, we'll look at how useful this year's statutory profit is, when analysing Plano & Plano Desenvolvimento Imobiliário (BVMF:PLPL3).

While Plano & Plano Desenvolvimento Imobiliário was able to generate revenue of R$847.5m in the last twelve months, we think its profit result of R$118.0m was more important.

View our latest analysis for Plano & Plano Desenvolvimento Imobiliário

Of course, when it comes to statutory profit, the devil is often in the detail, and we can get a better sense for a company by diving deeper into the financial statements. Today, we'll discuss Plano & Plano Desenvolvimento Imobiliário'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 Plano & Plano Desenvolvimento Imobiliário'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. 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.

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.

Plano & Plano Desenvolvimento Imobiliário has an accrual ratio of 0.54 for the year to September 2020. As a general rule, that bodes poorly for future profitability. To wit, the company did not generate one whit of free cashflow in that time. In the last twelve months it actually had negative free cash flow, with an outflow of R$4.4m despite its profit of R$118.0m, mentioned above. We saw that FCF was R$33m a year ago though, so Plano & Plano Desenvolvimento Imobiliário has at least been able to generate positive FCF in the past.

Our Take On Plano & Plano Desenvolvimento Imobiliário's Profit Performance

As we discussed above, we think Plano & Plano Desenvolvimento Imobiliário's earnings were not supported by free cash flow, which might concern some investors. As a result, we think it may well be the case that Plano & Plano Desenvolvimento Imobiliário's underlying earnings power is lower than its statutory profit. 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. In light of this, if you'd like to do more analysis on the company, it's vital to be informed of the risks involved. To help with this, we've discovered 3 warning signs (2 are significant!) that you ought to be aware of before buying any shares in Plano & Plano Desenvolvimento Imobiliário.

Today we've zoomed in on a single data point to better understand the nature of Plano & Plano Desenvolvimento Imobiliário'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 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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