Investors Shouldn't Be Too Comfortable With Soprocal Calerías e Industrias' (SNSE:SOPROCAL) Robust Earnings

Soprocal, Calerías e Industrias S.A.'s (SNSE:SOPROCAL) robust earnings report didn't manage to move the market for its stock. Our analysis suggests that shareholders have noticed something concerning in the numbers.

Check out our latest analysis for Soprocal Calerías e Industrias

A Closer Look At Soprocal Calerías e Industrias' 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. 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. 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.

Over the twelve months to June 2022, Soprocal Calerías e Industrias recorded an accrual ratio of 0.21. We can therefore deduce that its free cash flow fell well short of covering its statutory profit. Over the last year it actually had negative free cash flow of CL$378m, in contrast to the aforementioned profit of CL$993.0m. It's worth noting that Soprocal Calerías e Industrias generated positive FCF of CL$58m a year ago, so at least they've done it in the past. The good news for shareholders is that Soprocal Calerías e Industrias' accrual ratio was much better last year, so this year's poor reading might simply be a case of a short term mismatch between profit and FCF. 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 Soprocal Calerías e Industrias.

Our Take On Soprocal Calerías e Industrias' Profit Performance

Soprocal Calerías e Industrias didn't convert much of its profit to free cash flow in the last year, which some investors may consider rather suboptimal. Because of this, we think that it may be that Soprocal Calerías e Industrias' statutory profits are better than its underlying earnings power. The good news is that it earned a profit in the last twelve months, despite its previous loss. 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'd like to know more about Soprocal Calerías e Industrias as a business, it's important to be aware of any risks it's facing. At Simply Wall St, we found 2 warning signs for Soprocal Calerías e Industrias and we think they deserve your attention.

This note has only looked at a single factor that sheds light on the nature of Soprocal Calerías e Industrias' 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 that insiders are buying 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.