Solid Earnings Reflect Positivo Tecnologia's (BVMF:POSI3) Strength As A Business

Even though Positivo Tecnologia S.A. (BVMF:POSI3 ) posted strong earnings, investors appeared to be underwhelmed. Our analysis says that investors should be optimistic, as the strong profit is built on solid foundations.

Check out our latest analysis for Positivo Tecnologia

Examining Cashflow Against Positivo Tecnologia'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. 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. 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 June 2024, Positivo Tecnologia recorded an accrual ratio of -0.11. That indicates that its free cash flow was a fair bit more than its statutory profit. In fact, it had free cash flow of R$554m in the last year, which was a lot more than its statutory profit of R$284.6m. Positivo Tecnologia's free cash flow improved over the last year, which is generally good to see.

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 Positivo Tecnologia's Profit Performance

As we discussed above, Positivo Tecnologia has perfectly satisfactory free cash flow relative to profit. Based on this observation, we consider it likely that Positivo Tecnologia's statutory profit actually understates its earnings potential! And the EPS is up 21% annually, over the last three years. At the end of the day, it's essential to consider more than just the factors above, if you want to understand the company properly. If you'd like to know more about Positivo Tecnologia as a business, it's important to be aware of any risks it's facing. For instance, we've identified 2 warning signs for Positivo Tecnologia (1 is a bit concerning) you should be familiar with.

This note has only looked at a single factor that sheds light on the nature of Positivo Tecnologia'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.