Why Equatorial Pará Distribuidora de Energia's (BVMF:EQPA3) Shaky Earnings Are Just The Beginning Of Its Problems

A lackluster earnings announcement from Equatorial Pará Distribuidora de Energia S.A. (BVMF:EQPA3) last week didn't sink the stock price. However, we believe that investors should be aware of some underlying factors which may be of concern.

We've discovered 3 warning signs about Equatorial Pará Distribuidora de Energia. View them for free.

Examining Cashflow Against Equatorial Pará Distribuidora de Energia'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. 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. While having an accrual ratio above zero is of little concern, we do think it's worth noting when a company has a relatively high accrual ratio. 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 March 2025, Equatorial Pará Distribuidora de Energia recorded an accrual ratio of 0.22. Therefore, we know that it's free cashflow was significantly lower than its statutory profit, which is hardly a good thing. In the last twelve months it actually had negative free cash flow, with an outflow of R$320m despite its profit of R$1.94b, mentioned above. We also note that Equatorial Pará Distribuidora de Energia's free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of R$320m.

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

Equatorial Pará Distribuidora de Energia didn't convert much of its profit to free cash flow in the last year, which some investors may consider rather suboptimal. Therefore, it seems possible to us that Equatorial Pará Distribuidora de Energia's true underlying earnings power is actually less than its statutory profit. But at least holders can take some solace from the 59% per annum growth in EPS for the last three. 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. So while earnings quality is important, it's equally important to consider the risks facing Equatorial Pará Distribuidora de Energia at this point in time. When we did our research, we found 3 warning signs for Equatorial Pará Distribuidora de Energia (1 is a bit concerning!) that we believe deserve your full attention.

This note has only looked at a single factor that sheds light on 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. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks with high insider ownership.

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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.