Investors Shouldn't Be Too Comfortable With Compañía Eléctrica del Litoral's (SNSE:LITORAL) Earnings

Despite posting some strong earnings, the market for Compañía Eléctrica del Litoral S.A.'s (SNSE:LITORAL) stock hasn't moved much. We did some digging, and we found some concerning factors in the details.

See our latest analysis for Compañía Eléctrica del Litoral

Zooming In On Compañía Eléctrica del Litoral'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). 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'.

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. 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".

Compañía Eléctrica del Litoral has an accrual ratio of 0.22 for the year to March 2024. Therefore, we know that it's free cashflow was significantly lower than its statutory profit, which is hardly a good thing. Over the last year it actually had negative free cash flow of CL$819m, in contrast to the aforementioned profit of CL$3.32b. Coming off the back of negative free cash flow last year, we imagine some shareholders might wonder if its cash burn of CL$819m, this year, indicates high risk.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Compañía Eléctrica del Litoral.

Our Take On Compañía Eléctrica del Litoral's Profit Performance

Compañía Eléctrica del Litoral 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 Compañía Eléctrica del Litoral's statutory profits are better than its underlying earnings power. But the good news is that its EPS growth over the last three years has been very impressive. 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 Compañía Eléctrica del Litoral as a business, it's important to be aware of any risks it's facing. When we did our research, we found 2 warning signs for Compañía Eléctrica del Litoral (1 is potentially serious!) that we believe deserve your full attention.

Today we've zoomed in on a single data point to better understand the nature of Compañía Eléctrica del Litoral'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. 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.