Shareholders Will Be Pleased With The Quality of Empresas La Polar's (SNSE:NUEVAPOLAR) Earnings

Empresas La Polar S.A.'s (SNSE:NUEVAPOLAR) strong earnings report was rewarded with a positive stock price move. We did some digging and found some further encouraging factors that investors will like.

Check out our latest analysis for Empresas La Polar

Examining Cashflow Against Empresas La Polar's 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. 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. While it's not a problem to have a positive accrual ratio, indicating a certain level of non-cash profits, a high accrual ratio is arguably a bad thing, because it indicates paper profits are not matched by cash flow. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

Empresas La Polar has an accrual ratio of -0.56 for the year to June 2021. That indicates that its free cash flow quite significantly exceeded its statutory profit. Indeed, in the last twelve months it reported free cash flow of CL$81b, well over the CL$15.5b it reported in profit. Empresas La Polar'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 Empresas La Polar.

Our Take On Empresas La Polar's Profit Performance

As we discussed above, Empresas La Polar's accrual ratio indicates strong conversion of profit to free cash flow, which is a positive for the company. Because of this, we think Empresas La Polar's underlying earnings potential is as good as, or possibly even better, than the statutory profit makes it seem! And it's also positive that the company showed enough improvement to book a profit this year, after losing money last year. The goal of this article has been to assess how well we can rely on the statutory earnings to reflect the company's potential, but there is plenty more to consider. So while earnings quality is important, it's equally important to consider the risks facing Empresas La Polar at this point in time. For example - Empresas La Polar has 1 warning sign we think you should be aware of.

This note has only looked at a single factor that sheds light on the nature of Empresas La Polar's profit. 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. 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.
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