Investors Shouldn't Be Too Comfortable With Intelbras - Indústria de Telecomunicação Eletrônica Brasileira's (BVMF:INTB3) Robust Earnings

Intelbras S.A. - Indústria de Telecomunicação Eletrônica Brasileira (BVMF:INTB3) just reported some strong earnings, and the market rewarded them with a positive share price move. However, we think that shareholders may be missing some concerning details in the numbers.

View our latest analysis for Intelbras - Indústria de Telecomunicação Eletrônica Brasileira

A Closer Look At Intelbras - Indústria de Telecomunicação Eletrônica Brasileira'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. 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. 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 it's not a problem to have a positive accrual ratio, indicating a certain level of non-cash profits, a high accrual ratio is arguably a bad thing, because it indicates paper profits are not matched by cash flow. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

Intelbras - Indústria de Telecomunicação Eletrônica Brasileira has an accrual ratio of 0.58 for the year to June 2021. As a general rule, that bodes poorly for future profitability. To wit, the company did not generate one whit of free cashflow in that time. Over the last year it actually had negative free cash flow of R$114m, in contrast to the aforementioned profit of R$476.3m. It's worth noting that Intelbras - Indústria de Telecomunicação Eletrônica Brasileira generated positive FCF of R$59m 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 Intelbras - Indústria de Telecomunicação Eletrônica Brasileira's Profit Performance

As we discussed above, we think Intelbras - Indústria de Telecomunicação Eletrônica Brasileira's earnings were not supported by free cash flow, which might concern some investors. As a result, we think it may well be the case that Intelbras - Indústria de Telecomunicação Eletrônica Brasileira's underlying earnings power is lower than its statutory profit. But on the bright side, its earnings per share have grown at an extremely impressive rate over the last three years. 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. For example, Intelbras - Indústria de Telecomunicação Eletrônica Brasileira has 2 warning signs (and 1 which is significant) we think you should know about.

Today we've zoomed in on a single data point to better understand the nature of Intelbras - Indústria de Telecomunicação Eletrônica Brasileira'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. 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.
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