Amerigo Resources' (TSE:ARG) Robust Earnings Are Supported By Other Strong Factors

When companies post strong earnings, the stock generally performs well, just like Amerigo Resources Ltd.'s (TSE:ARG) stock has recently. We did some digging and found some further encouraging factors that investors will like.

Check out our latest analysis for Amerigo Resources

A Closer Look At Amerigo Resources' 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. The accrual ratio subtracts the FCF from the profit for a given period, and divides the result by the average operating assets of the company over that time. This ratio tells us how much of a company's profit is not backed by free cashflow.

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. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

Amerigo Resources has an accrual ratio of -0.18 for the year to March 2021. Therefore, its statutory earnings were very significantly less than its free cashflow. To wit, it produced free cash flow of US$46m during the period, dwarfing its reported profit of US$21.0m. Amerigo Resources' free cash flow improved over the last year, which is generally good to see.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Amerigo Resources.

Our Take On Amerigo Resources' Profit Performance

Happily for shareholders, Amerigo Resources produced plenty of free cash flow to back up its statutory profit numbers. Based on this observation, we consider it possible that Amerigo Resources' statutory profit actually understates its earnings potential! And one can definitely find a positive in the fact that it made a profit this year, despite losing money last year. 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 Amerigo Resources at this point in time. Case in point: We've spotted 3 warning signs for Amerigo Resources you should be aware of.

Today we've zoomed in on a single data point to better understand the nature of Amerigo Resources' 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 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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