Equatorial Pará Distribuidora de Energia's (BVMF:EQPA3) Weak Earnings May Only Reveal A Part Of The Whole Picture

Equatorial Pará Distribuidora de Energia S.A.'s (BVMF:EQPA3) recent weak earnings report didn't cause a big stock movement. However, we believe that investors should be aware of some underlying factors which may be of concern.

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Examining Cashflow Against Equatorial Pará Distribuidora de Energia'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.

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 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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

Equatorial Pará Distribuidora de Energia has an accrual ratio of 0.33 for the year to September 2025. We can therefore deduce that its free cash flow fell well short of covering its statutory profit, suggesting we might want to think twice before putting a lot of weight on the latter. Even though it reported a profit of R$1.65b, a look at free cash flow indicates it actually burnt through R$1.2b in the last year. Coming off the back of negative free cash flow last year, we imagine some shareholders might wonder if its cash burn of R$1.2b, this year, indicates high risk.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Equatorial Pará Distribuidora de Energia.

Our Take On Equatorial Pará Distribuidora de Energia's Profit Performance

As we discussed above, we think Equatorial Pará Distribuidora de Energia'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 Equatorial Pará Distribuidora de Energia's underlying earnings power is lower than its statutory profit. But at least holders can take some solace from the 30% 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. If you want to do dive deeper into Equatorial Pará Distribuidora de Energia, you'd also look into what risks it is currently facing. For example, we've discovered 3 warning signs that you should run your eye over to get a better picture of Equatorial Pará Distribuidora de Energia.

Today we've zoomed in on a single data point to better understand the nature of Equatorial Pará Distribuidora de Energia'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 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.