Statutory Profit Doesn't Reflect How Good Nutriplant Indústria e Comércio S/A's (BVMF:NUTR3) Earnings Are

The subdued stock price reaction suggests that Nutriplant Indústria e Comércio S/A's (BVMF:NUTR3) strong earnings didn't offer any surprises. Investors are probably missing some underlying factors which are encouraging for the future of the company.

Check out our latest analysis for Nutriplant Indústria e Comércio S/A

Examining Cashflow Against Nutriplant Indústria e Comércio S/A's 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. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

Therefore, it's actually considered a good thing when a company has a negative accrual ratio, but a bad thing if its accrual ratio is positive. 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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

Nutriplant Indústria e Comércio S/A has an accrual ratio of -0.20 for the year to June 2024. 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$13m, well over the R$6.01m it reported in profit. Nutriplant Indústria e Comércio S/A's 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 Nutriplant Indústria e Comércio S/A.

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

As we discussed above, Nutriplant Indústria e Comércio S/A's accrual ratio indicates strong conversion of profit to free cash flow, which is a positive for the company. Based on this observation, we consider it possible that Nutriplant Indústria e Comércio S/A's statutory profit actually understates its earnings potential! And the EPS is up 36% annually, over the last three years. 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. In light of this, if you'd like to do more analysis on the company, it's vital to be informed of the risks involved. Every company has risks, and we've spotted 2 warning signs for Nutriplant Indústria e Comércio S/A you should know about.

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. 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.