General Shopping e Outlets do Brasil's (BVMF:GSHP3) Earnings Are Of Questionable Quality

Despite posting some strong earnings, the market for General Shopping e Outlets do Brasil S.A.'s (BVMF:GSHP3) stock hasn't moved much. We did some digging, and we found some concerning factors in the details.

Check out our latest analysis for General Shopping e Outlets do Brasil

Zooming In On General Shopping e Outlets do Brasil'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). 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. This ratio tells us how much of a company's profit is not backed by free cashflow.

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 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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

General Shopping e Outlets do Brasil has an accrual ratio of 0.25 for the year to March 2022. Unfortunately, that means its free cash flow fell significantly short of its reported profits. Over the last year it actually had negative free cash flow of R$223m, in contrast to the aforementioned profit of R$66.8m. Coming off the back of negative free cash flow last year, we imagine some shareholders might wonder if its cash burn of R$223m, this year, indicates high risk. One positive for General Shopping e Outlets do Brasil 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 General Shopping e Outlets do Brasil.

Our Take On General Shopping e Outlets do Brasil's Profit Performance

General Shopping e Outlets do Brasil didn't convert much of its profit to free cash flow in the last year, which some investors may consider rather suboptimal. Therefore, it seems possible to us that General Shopping e Outlets do Brasil's true underlying earnings power is actually less than its statutory profit. The good news is that it earned a profit in the last twelve months, despite its previous loss. 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. So if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. Be aware that General Shopping e Outlets do Brasil is showing 4 warning signs in our investment analysis and 3 of those make us uncomfortable...

Today we've zoomed in on a single data point to better understand the nature of General Shopping e Outlets do Brasil's 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. 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 that insiders are buying 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.