LPS Brasil - Consultoria de Imóveis' (BVMF:LPSB3) Solid Earnings Have Been Accounted For Conservatively

LPS Brasil - Consultoria de Imóveis S.A.'s (BVMF:LPSB3) recent earnings report didn't offer any surprises, with the shares unchanged over the last week. Our analysis suggests that shareholders might be missing some positive underlying factors in the earnings report.

View our latest analysis for LPS Brasil - Consultoria de Imóveis

A Closer Look At LPS Brasil - Consultoria de Imóveis' Earnings

One key financial ratio used to measure how well a company converts its profit to free cash flow (FCF) is the accrual ratio. 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.

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.

Over the twelve months to March 2024, LPS Brasil - Consultoria de Imóveis recorded an accrual ratio of -0.12. That implies it has good cash conversion, and implies that its free cash flow solidly exceeded its profit last year. In fact, it had free cash flow of R$38m in the last year, which was a lot more than its statutory profit of R$21.5m. LPS Brasil - Consultoria de Imóveis 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 LPS Brasil - Consultoria de Imóveis.

Our Take On LPS Brasil - Consultoria de Imóveis' Profit Performance

As we discussed above, LPS Brasil - Consultoria de Imóveis has perfectly satisfactory free cash flow relative to profit. Based on this observation, we consider it likely that LPS Brasil - Consultoria de Imóveis' statutory profit actually understates its earnings potential! Better yet, its EPS are growing strongly, which is nice to see. Of course, we've only just scratched the surface when it comes to analysing its earnings; one could also consider margins, forecast growth, and return on investment, among other factors. 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. While conducting our analysis, we found that LPS Brasil - Consultoria de Imóveis has 1 warning sign and it would be unwise to ignore this.

This note has only looked at a single factor that sheds light on the nature of LPS Brasil - Consultoria de Imóveis' profit. But there are plenty of other ways to inform your opinion of a company. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.