Getnet Adquirência e Serviços para Meios de Pagamento's (BVMF:GETT3) Promising Earnings May Rest On Soft Foundations

Despite posting some strong earnings, the market for Getnet Adquirência e Serviços para Meios de Pagamento S.A.'s (BVMF:GETT3) 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 Getnet Adquirência e Serviços para Meios de Pagamento

Zooming In On Getnet Adquirência e Serviços para Meios de Pagamento'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. In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that period. The ratio shows us how much a company's profit exceeds its FCF.

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. 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.

Over the twelve months to December 2021, Getnet Adquirência e Serviços para Meios de Pagamento recorded an accrual ratio of 0.51. 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. In the last twelve months it actually had negative free cash flow, with an outflow of R$1.4b despite its profit of R$476.2m, mentioned above. It's worth noting that Getnet Adquirência e Serviços para Meios de Pagamento generated positive FCF of R$25m a year ago, so at least they've done it in the past.

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 Getnet Adquirência e Serviços para Meios de Pagamento's Profit Performance

As we have made quite clear, we're a bit worried that Getnet Adquirência e Serviços para Meios de Pagamento didn't back up the last year's profit with free cashflow. As a result, we think it may well be the case that Getnet Adquirência e Serviços para Meios de Pagamento's underlying earnings power is lower than its statutory profit. The good news is that, its earnings per share increased by 32% in the last year. 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. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. To help with this, we've discovered 4 warning signs (2 don't sit too well with us!) that you ought to be aware of before buying any shares in Getnet Adquirência e Serviços para Meios de Pagamento.

Today we've zoomed in on a single data point to better understand the nature of Getnet Adquirência e Serviços para Meios de Pagamento's 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 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.