Investors Shouldn't Be Too Comfortable With Moura Dubeux Engenharia's (BVMF:MDNE3) Earnings

Despite posting some strong earnings, the market for Moura Dubeux Engenharia S.A.'s (BVMF:MDNE3) 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 Moura Dubeux Engenharia

Zooming In On Moura Dubeux Engenharia's 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). 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. The ratio shows us how much a company's profit exceeds its FCF.

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. That is not intended to imply we should worry about a positive accrual ratio, but it's worth noting where the accrual ratio is rather high. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

For the year to September 2024, Moura Dubeux Engenharia had an accrual ratio of 0.41. Statistically speaking, that's a real negative for future earnings. And indeed, during the period the company didn't produce any free cash flow whatsoever. Over the last year it actually had negative free cash flow of R$103m, in contrast to the aforementioned profit of R$240.2m. Coming off the back of negative free cash flow last year, we imagine some shareholders might wonder if its cash burn of R$103m, this year, indicates high risk.

That might leave you wondering what analysts are forecasting in terms of future profitability. Luckily, you can click here to see an interactive graph depicting future profitability, based on their estimates.

Our Take On Moura Dubeux Engenharia's Profit Performance

As we have made quite clear, we're a bit worried that Moura Dubeux Engenharia didn't back up the last year's profit with free cashflow. As a result, we think it may well be the case that Moura Dubeux Engenharia's underlying earnings power is lower than its statutory profit. But the good news is that its EPS growth over the last three years has been very impressive. 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. If you'd like to know more about Moura Dubeux Engenharia as a business, it's important to be aware of any risks it's facing. At Simply Wall St, we found 1 warning sign for Moura Dubeux Engenharia and we think they deserve your attention.

This note has only looked at a single factor that sheds light on the nature of Moura Dubeux Engenharia'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. While it might take a little research on your behalf, you may find this free collection of companies boasting high return on equity, or this list of stocks with significant insider holdings to be useful.

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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.