Sendas Distribuidora's (BVMF:ASAI3) Solid Earnings Have Been Accounted For Conservatively

Sendas Distribuidora S.A.'s (BVMF:ASAI3) recent earnings report didn't offer any surprises, with the shares unchanged over the last week. We did some digging, and we think that investors are missing some encouraging factors in the underlying numbers.

View our latest analysis for Sendas Distribuidora

A Closer Look At Sendas Distribuidora'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. 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.

For the year to June 2021, Sendas Distribuidora had an accrual ratio of -0.15. Therefore, its statutory earnings were very significantly less than its free cashflow. To wit, it produced free cash flow of R$3.2b during the period, dwarfing its reported profit of R$1.37b. Sendas Distribuidora's free cash flow improved over the last year, which is generally good to see.

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.

Our Take On Sendas Distribuidora's Profit Performance

As we discussed above, Sendas Distribuidora has perfectly satisfactory free cash flow relative to profit. Because of this, we think Sendas Distribuidora's earnings potential is at least as good as it seems, and maybe even better! And the EPS is up 46% over the last twelve months. 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. If you want to do dive deeper into Sendas Distribuidora, you'd also look into what risks it is currently facing. You'd be interested to know, that we found 1 warning sign for Sendas Distribuidora and you'll want to know about it.

Today we've zoomed in on a single data point to better understand the nature of Sendas Distribuidora'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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