Cruzeiro do Sul Educacional's (BVMF:CSED3) Robust Earnings Are Supported By Other Strong Factors

By
Simply Wall St
Published
November 24, 2021
BOVESPA:CSED3
Source: Shutterstock

The subdued stock price reaction suggests that Cruzeiro do Sul Educacional S.A.'s (BVMF:CSED3) strong earnings didn't offer any surprises. We think that investors have missed some encouraging factors underlying the profit figures.

See our latest analysis for Cruzeiro do Sul Educacional

earnings-and-revenue-history
BOVESPA:CSED3 Earnings and Revenue History November 24th 2021

A Closer Look At Cruzeiro do Sul Educacional'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.

As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. While it's not a problem to have a positive accrual ratio, indicating a certain level of non-cash profits, a high accrual ratio is arguably a bad thing, because it indicates paper profits are not matched by cash flow. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

Over the twelve months to September 2021, Cruzeiro do Sul Educacional recorded an accrual ratio of -0.17. Therefore, its statutory earnings were very significantly less than its free cashflow. To wit, it produced free cash flow of R$357m during the period, dwarfing its reported profit of R$101.4m. Cruzeiro do Sul Educacional'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 Cruzeiro do Sul Educacional's Profit Performance

As we discussed above, Cruzeiro do Sul Educacional's accrual ratio indicates strong conversion of profit to free cash flow, which is a positive for the company. Because of this, we think Cruzeiro do Sul Educacional's underlying earnings potential is as good as, or possibly even better, than the statutory profit makes it seem! And it's also positive that the company showed enough improvement to book a profit this year, after losing money 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. If you'd like to know more about Cruzeiro do Sul Educacional as a business, it's important to be aware of any risks it's facing. At Simply Wall St, we found 1 warning sign for Cruzeiro do Sul Educacional and we think they deserve your attention.

This note has only looked at a single factor that sheds light on the nature of Cruzeiro do Sul Educacional'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.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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Simply Wall St is focused on providing unbiased, high-quality research coverage on every listed company in the world. Our research team consists of data scientists and multiple equity analysts with over two decades worth of financial markets experience between them.