LATAM Airlines Group's (SNSE:LTM) Solid Earnings Are Supported By Other Strong Factors

Even though LATAM Airlines Group S.A.'s (SNSE:LTM) recent earnings release was robust, the market didn't seem to notice. We think that investors have missed some encouraging factors underlying the profit figures.

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Examining Cashflow Against LATAM Airlines Group'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. In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that period. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

Therefore, it's actually considered a good thing when a company has a negative accrual ratio, but a bad thing if its accrual ratio is positive. 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. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

LATAM Airlines Group has an accrual ratio of -0.16 for the year to September 2025. Therefore, its statutory earnings were very significantly less than its free cashflow. Indeed, in the last twelve months it reported free cash flow of US$1.6b, well over the US$1.25b it reported in profit. Over the last year, LATAM Airlines Group's free cash flow remained steady.

That might leave you wondering what analysts are forecasting in terms of future profitability. Luckily, you can click here to see an interactive graph depicting future profitability, based on their estimates.

Our Take On LATAM Airlines Group's Profit Performance

As we discussed above, LATAM Airlines Group has perfectly satisfactory free cash flow relative to profit. Based on this observation, we consider it likely that LATAM Airlines Group's statutory profit actually understates its earnings potential! And on top of that, its earnings per share increased by 60% in the 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 LATAM Airlines Group at this point in time. Case in point: We've spotted 2 warning signs for LATAM Airlines Group you should be aware of.

Today we've zoomed in on a single data point to better understand the nature of LATAM Airlines Group's 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. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks with high insider ownership.

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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.