Investors Shouldn't Be Too Comfortable With Nutriplant Indústria e Comércio S/A's (BVMF:NUTR3) Robust Earnings

Despite posting some strong earnings, the market for Nutriplant Indústria e Comércio S/A's (BVMF:NUTR3) stock hasn't moved much. Our analysis suggests that this might be because shareholders have noticed some concerning underlying factors.

View our latest analysis for Nutriplant Indústria e Comércio S/A

A Closer Look At Nutriplant Indústria e Comércio S/A'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. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

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".

Over the twelve months to December 2021, Nutriplant Indústria e Comércio S/A recorded an accrual ratio of 0.33. Therefore, we know that it's free cashflow was significantly lower than its statutory profit, raising questions about how useful that profit figure really is. Even though it reported a profit of R$6.69m, a look at free cash flow indicates it actually burnt through R$3.2m in the last year. We saw that FCF was R$5.0m a year ago though, so Nutriplant Indústria e Comércio S/A has at least been able to generate positive FCF in the past. One positive for Nutriplant Indústria e Comércio S/A 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.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Nutriplant Indústria e Comércio S/A.

Our Take On Nutriplant Indústria e Comércio S/A's Profit Performance

As we discussed above, we think Nutriplant Indústria e Comércio S/A's earnings were not supported by free cash flow, which might concern some investors. For this reason, we think that Nutriplant Indústria e Comércio S/A's statutory profits may be a bad guide to its underlying earnings power, and might give investors an overly positive impression of the company. But the happy news is that, while acknowledging we have to look beyond the statutory numbers, those numbers are still improving, with EPS growing at a very high 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 Nutriplant Indústria e Comércio S/A as a business, it's important to be aware of any risks it's facing. While conducting our analysis, we found that Nutriplant Indústria e Comércio S/A has 3 warning signs and it would be unwise to ignore them.

This note has only looked at a single factor that sheds light on the nature of Nutriplant Indústria e Comércio S/A's 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 that insiders are buying.

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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.