We Think Cruzeiro do Sul Educacional's (BVMF:CSED3) Robust Earnings Are Conservative

When companies post strong earnings, the stock generally performs well, just like Cruzeiro do Sul Educacional S.A.'s (BVMF:CSED3) stock has recently. We did some digging and found some further encouraging factors that investors will like.

View our latest analysis for Cruzeiro do Sul Educacional

Examining Cashflow Against 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. 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.

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. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

Cruzeiro do Sul Educacional has an accrual ratio of -0.17 for the year to September 2024. That implies it has very good cash conversion, and that its earnings in the last year actually significantly understate its free cash flow. In fact, it had free cash flow of R$453m in the last year, which was a lot more than its statutory profit of R$161.0m. Cruzeiro do Sul Educacional shareholders are no doubt pleased that free cash flow improved over the last twelve months.

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

Happily for shareholders, Cruzeiro do Sul Educacional produced plenty of free cash flow to back up its statutory profit numbers. 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 on top of that, its earnings per share have grown at an extremely impressive rate over the last year. The goal of this article has been to assess how well we can rely on the statutory earnings to reflect the company's potential, but there is plenty more to consider. 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. For example - Cruzeiro do Sul Educacional has 1 warning sign we think you should be aware of.

Today we've zoomed in on a single data point to better understand the nature of Cruzeiro do Sul Educacional's profit. But there is always more to discover if you are capable of focussing your mind on minutiae. Some people consider a high return on equity to be a good sign of a quality business. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks with high insider ownership.

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

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.