We Think Profarma Distribuidora de Produtos Farmacêuticos' (BVMF:PFRM3) Robust Earnings Are Conservative

Profarma Distribuidora de Produtos Farmacêuticos S.A. (BVMF:PFRM3) just reported healthy earnings but the stock price didn't move much. Our analysis suggests that investors might be missing some promising details.

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A Closer Look At Profarma Distribuidora de Produtos Farmacêuticos' Earnings

In high finance, the key ratio used to measure how well a company converts reported profits into free cash flow (FCF) is the accrual ratio (from cashflow). 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. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

That means a negative accrual ratio is a good thing, because it shows that the company is bringing in more free cash flow than its profit would suggest. 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".

Profarma Distribuidora de Produtos Farmacêuticos has an accrual ratio of -0.12 for the year to December 2024. Therefore, its statutory earnings were quite a lot less than its free cashflow. In fact, it had free cash flow of R$367m in the last year, which was a lot more than its statutory profit of R$114.6m. Profarma Distribuidora de Produtos Farmacêuticos' free cash flow improved over the last year, which is generally good to see.

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. Based on this observation, we consider it likely that Profarma Distribuidora de Produtos Farmacêuticos' statutory profit actually understates its earnings potential! And on top of that, its earnings per share have grown at 46% per year over the last three years. 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 want to do dive deeper into Profarma Distribuidora de Produtos Farmacêuticos, you'd also look into what risks it is currently facing. For example - Profarma Distribuidora de Produtos Farmacêuticos has 1 warning sign we think you should be aware of.

This note has only looked at a single factor that sheds light on the nature of Profarma Distribuidora de Produtos Farmacêuticos' profit. 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.