We Don’t Think AgroGalaxy Participações' (BVMF:AGXY3) Earnings Should Make Shareholders Too Comfortable

AgroGalaxy Participações S.A. (BVMF:AGXY3) posted some decent earnings, but shareholders didn't react strongly. We think that they might be concerned about some underlying details that our analysis found.

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Examining Cashflow Against AgroGalaxy Participações' Earnings

One key financial ratio used to measure how well a company converts its profit to free cash flow (FCF) is the accrual ratio. In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that 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 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. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

AgroGalaxy Participações has an accrual ratio of 2.08 for the year to September 2025. Ergo, its free cash flow is significantly weaker than its profit. As a general rule, that bodes poorly for future profitability. In fact, it had free cash flow of R$78m in the last year, which was a lot less than its statutory profit of R$1.23b. Notably, AgroGalaxy Participações had negative free cash flow last year, so the R$78m it produced this year was a welcome improvement. However, that's not all there is to consider. We can see that unusual items have impacted its statutory profit, and therefore the accrual ratio. One positive for AgroGalaxy Participações shareholders is that it's accrual ratio was significantly better last year, providing reason to believe that it may return to stronger cash conversion in the future. As a result, some shareholders may be looking for stronger cash conversion in the current year.

Check out our latest analysis for AgroGalaxy Participações

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of AgroGalaxy Participações.

How Do Unusual Items Influence Profit?

The fact that the company had unusual items boosting profit by R$940m, in the last year, probably goes some way to explain why its accrual ratio was so weak. We can't deny that higher profits generally leave us optimistic, but we'd prefer it if the profit were to be sustainable. We ran the numbers on most publicly listed companies worldwide, and it's very common for unusual items to be once-off in nature. And, after all, that's exactly what the accounting terminology implies. AgroGalaxy Participações had a rather significant contribution from unusual items relative to its profit to September 2025. All else being equal, this would likely have the effect of making the statutory profit a poor guide to underlying earnings power.

Our Take On AgroGalaxy Participações' Profit Performance

Summing up, AgroGalaxy Participações received a nice boost to profit from unusual items, but could not match its paper profit with free cash flow. On reflection, the above-mentioned factors give us the strong impression that AgroGalaxy Participações'underlying earnings power is not as good as it might seem, based on the statutory profit numbers. If you'd like to know more about AgroGalaxy Participações as a business, it's important to be aware of any risks it's facing. For example, AgroGalaxy Participações has 4 warning signs (and 3 which are a bit unpleasant) we think you should know about.

In this article we've looked at a number of factors that can impair the utility of profit numbers, and we've come away cautious. But there are plenty of other ways to inform your opinion of a company. 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.

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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.