There Might Be More To Blanco y Negro's (SNSE:COLO COLO) Story Than Just Weak Earnings

Blanco y Negro S.A.'s (SNSE:COLO COLO) stock wasn't much affected by its recent lackluster earnings numbers. Our analysis suggests that they may be missing some concerning details underlying the profit numbers.

See our latest analysis for Blanco y Negro

Examining Cashflow Against Blanco y Negro'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). 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. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. 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".

Blanco y Negro has an accrual ratio of 0.52 for the year to March 2024. Statistically speaking, that's a real negative for future earnings. To wit, the company did not generate one whit of free cashflow in that time. Over the last year it actually had negative free cash flow of CL$6.0b, in contrast to the aforementioned profit of CL$2.00b. Coming off the back of negative free cash flow last year, we imagine some shareholders might wonder if its cash burn of CL$6.0b, this year, indicates high risk. Having said that, there is more to the story. The accrual ratio is reflecting the impact of unusual items on statutory profit, at least in part.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Blanco y Negro.

How Do Unusual Items Influence Profit?

Given the accrual ratio, it's not overly surprising that Blanco y Negro's profit was boosted by unusual items worth CL$1.3b in the last twelve months. We can't deny that higher profits generally leave us optimistic, but we'd prefer it if the profit were to be sustainable. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. Which is hardly surprising, given the name. Blanco y Negro had a rather significant contribution from unusual items relative to its profit to March 2024. All else being equal, this would likely have the effect of making the statutory profit a poor guide to underlying earnings power.

Our Take On Blanco y Negro's Profit Performance

Blanco y Negro had a weak accrual ratio, but its profit did receive a boost from unusual items. Considering all this we'd argue Blanco y Negro's profits probably give an overly generous impression of its sustainable level of profitability. If you want to do dive deeper into Blanco y Negro, you'd also look into what risks it is currently facing. When we did our research, we found 2 warning signs for Blanco y Negro (1 makes us a bit uncomfortable!) that we believe deserve your full attention.

Our examination of Blanco y Negro has focussed on certain factors that can make its earnings look better than they are. And, on that basis, we are somewhat skeptical. But there is always more to discover if you are capable of focussing your mind on minutiae. For example, many people consider a high return on equity as an indication of favorable business economics, while others like to 'follow the money' and search out stocks that insiders are buying. 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.

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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.