Shareholders Will Be Pleased With The Quality of Profarma Distribuidora de Produtos Farmacêuticos' (BVMF:PFRM3) Earnings

The subdued stock price reaction suggests that Profarma Distribuidora de Produtos Farmacêuticos S.A.'s (BVMF:PFRM3) strong earnings didn't offer any surprises. Investors are probably missing some underlying factors which are encouraging for the future of the company.

See our latest analysis for Profarma Distribuidora de Produtos Farmacêuticos

Zooming In On Profarma Distribuidora de Produtos Farmacêuticos' 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 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".

Over the twelve months to June 2024, Profarma Distribuidora de Produtos Farmacêuticos recorded an accrual ratio of -0.16. That implies it has very good cash conversion, and that its earnings in the last year actually significantly understate its free cash flow. Indeed, in the last twelve months it reported free cash flow of R$468m, well over the R$90.6m it reported in profit. Profarma Distribuidora de Produtos Farmacêuticos shareholders are no doubt pleased that free cash flow improved over the last twelve months.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Profarma Distribuidora de Produtos Farmacêuticos.

Our Take On Profarma Distribuidora de Produtos Farmacêuticos' Profit Performance

Profarma Distribuidora de Produtos Farmacêuticos' accrual ratio is solid, and indicates strong free cash flow, as we discussed, above. Because of this, we think Profarma Distribuidora de Produtos Farmacêuticos' earnings potential is at least as good as it seems, and maybe even better! And on top of that, its earnings per share have grown at an extremely impressive rate over the last year. 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'd like to know more about Profarma Distribuidora de Produtos Farmacêuticos as a business, it's important to be aware of any risks it's facing. You'd be interested to know, that we found 1 warning sign for Profarma Distribuidora de Produtos Farmacêuticos and you'll want to know about this.

This note has only looked at a single factor that sheds light on the nature of Profarma Distribuidora de Produtos Farmacêuticos' profit. But there is always more to discover if you are capable of focussing your mind on minutiae. 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 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.