Why Zona Franca de Iquique's (SNSE:ZOFRI) Earnings Are Better Than They Seem

The market seemed underwhelmed by last week's earnings announcement from Zona Franca de Iquique S.A. (SNSE:ZOFRI) despite the healthy numbers. We did some analysis to find out why and believe that investors might be missing some encouraging factors contained in the earnings.

See our latest analysis for Zona Franca de Iquique

Examining Cashflow Against Zona Franca de Iquique's Earnings

One key financial ratio used to measure how well a company converts its profit to free cash flow (FCF) is the accrual ratio. 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'.

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. 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 December 2023, Zona Franca de Iquique recorded an accrual ratio of -0.15. That indicates that its free cash flow quite significantly exceeded its statutory profit. To wit, it produced free cash flow of CL$19b during the period, dwarfing its reported profit of CL$17.7b. Zona Franca de Iquique's 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 Zona Franca de Iquique.

Our Take On Zona Franca de Iquique's Profit Performance

As we discussed above, Zona Franca de Iquique has perfectly satisfactory free cash flow relative to profit. Based on this observation, we consider it likely that Zona Franca de Iquique's statutory profit actually understates its earnings potential! Better yet, its EPS are growing strongly, which is nice to see. 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 Zona Franca de Iquique at this point in time. For example - Zona Franca de Iquique has 2 warning signs we think you should be aware of.

This note has only looked at a single factor that sheds light on the nature of Zona Franca de Iquique'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. 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. 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.