Rio Paranapanema Energia's (BVMF:GEPA3) Promising Earnings May Rest On Soft Foundations

Despite posting some strong earnings, the market for Rio Paranapanema Energia S.A.'s (BVMF:GEPA3) stock hasn't moved much. Our analysis suggests that shareholders have noticed something concerning in the numbers.

This technology could replace computers: discover the 20 stocks are working to make quantum computing a reality.

Examining Cashflow Against Rio Paranapanema 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. 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. 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. 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.

For the year to September 2025, Rio Paranapanema Energia had an accrual ratio of 0.34. Therefore, we know that it's free cashflow was significantly lower than its statutory profit, raising questions about how useful that profit figure really is. In the last twelve months it actually had negative free cash flow, with an outflow of R$394m despite its profit of R$445.7m, mentioned above. It's worth noting that Rio Paranapanema Energia generated positive FCF of R$476m a year ago, so at least they've done it in the past. One positive for Rio Paranapanema Energia shareholders is that it's accrual ratio was significantly better last year, providing reason to believe that it may return to stronger cash conversion in the future. As a result, some shareholders may be looking for stronger cash conversion in the current year.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Rio Paranapanema Energia.

Our Take On Rio Paranapanema Energia's Profit Performance

As we discussed above, we think Rio Paranapanema Energia's earnings were not supported by free cash flow, which might concern some investors. For this reason, we think that Rio Paranapanema Energia's statutory profits may be a bad guide to its underlying earnings power, and might give investors an overly positive impression of the company. But on the bright side, its earnings per share have grown at an extremely impressive rate 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 want to do dive deeper into Rio Paranapanema Energia, you'd also look into what risks it is currently facing. Case in point: We've spotted 4 warning signs for Rio Paranapanema Energia you should be mindful of and 2 of them are a bit concerning.

Today we've zoomed in on a single data point to better understand the nature of Rio Paranapanema Energia'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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.