Are Compañía Agropecuaria Copeval's (SNSE:COPEVAL) Statutory Earnings A Good Reflection Of Its Earnings Potential?

Statistically speaking, it is less risky to invest in profitable companies than in unprofitable ones. However, sometimes companies receive a one-off boost (or reduction) to their profit, and it's not always clear whether statutory profits are a good guide, going forward. Today we'll focus on whether this year's statutory profits are a good guide to understanding Compañía Agropecuaria Copeval (SNSE:COPEVAL).

While Compañía Agropecuaria Copeval was able to generate revenue of CL$302.1b in the last twelve months, we think its profit result of CL$4.64b was more important. The good news is that the company managed to grow its revenue over the last three years, and also move from loss-making to profitable.

See our latest analysis for Compañía Agropecuaria Copeval

Of course, when it comes to statutory profit, the devil is often in the detail, and we can get a better sense for a company by diving deeper into the financial statements. As a result, we think it's well worth considering what Compañía Agropecuaria Copeval's cashflow (when compared to its earnings) can tell us about the nature of its statutory profit. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Compañía Agropecuaria Copeval.

Zooming In On Compañía Agropecuaria Copeval'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). In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that period. This ratio tells us how much of a company's profit is not backed by free cashflow.

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 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 September 2020, Compañía Agropecuaria Copeval recorded an accrual ratio of -0.15. That implies it has very good cash conversion, and that its earnings in the last year actually significantly understate its free cash flow. In fact, it had free cash flow of CL$29b in the last year, which was a lot more than its statutory profit of CL$4.64b. Given that Compañía Agropecuaria Copeval had negative free cash flow in the prior corresponding period, the trailing twelve month resul of CL$29b would seem to be a step in the right direction.

Our Take On Compañía Agropecuaria Copeval's Profit Performance

Compañía Agropecuaria Copeval's accrual ratio is solid, and indicates strong free cash flow, as we discussed, above. Based on this observation, we consider it likely that Compañía Agropecuaria Copeval's statutory profit actually understates its earnings potential! And it's also positive that the company showed enough improvement to book a profit this year, after losing money last year. 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. So while earnings quality is important, it's equally important to consider the risks facing Compañía Agropecuaria Copeval at this point in time. To that end, you should learn about the 3 warning signs we've spotted with Compañía Agropecuaria Copeval (including 1 which is a bit concerning).

This note has only looked at a single factor that sheds light on the nature of Compañía Agropecuaria Copeval'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 that insiders are buying to be useful.

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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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