We Think That There Are Some Issues For Vamos Locação de Caminhões Máquinas e Equipamentos (BVMF:VAMO3) Beyond Its Promising Earnings

Vamos Locação de Caminhões, Máquinas e Equipamentos S.A. (BVMF:VAMO3) just released a solid earnings report, and the stock displayed some strength. Despite this, our analysis suggests that there are some factors weakening the foundations of those good profit numbers.

See our latest analysis for Vamos Locação de Caminhões Máquinas e Equipamentos

A Closer Look At Vamos Locação de Caminhões Máquinas e Equipamentos' Earnings

One key financial ratio used to measure how well a company converts its profit to free cash flow (FCF) is the accrual ratio. 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.

As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. 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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

Vamos Locação de Caminhões Máquinas e Equipamentos has an accrual ratio of 0.37 for the year to March 2021. 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$785m, in contrast to the aforementioned profit of R$215.9m. We also note that Vamos Locação de Caminhões Máquinas e Equipamentos' free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of R$785m.

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 Vamos Locação de Caminhões Máquinas e Equipamentos' Profit Performance

As we discussed above, we think Vamos Locação de Caminhões Máquinas e Equipamentos' 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 Vamos Locação de Caminhões Máquinas e Equipamentos' underlying earnings power is lower than its statutory profit. But at least holders can take some solace from the 66% per annum growth in EPS for the last three. 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. So while earnings quality is important, it's equally important to consider the risks facing Vamos Locação de Caminhões Máquinas e Equipamentos at this point in time. Case in point: We've spotted 3 warning signs for Vamos Locação de Caminhões Máquinas e Equipamentos you should be mindful of and 2 of these bad boys are a bit concerning.

Today we've zoomed in on a single data point to better understand the nature of Vamos Locação de Caminhões Máquinas e Equipamentos' 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. 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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