We Think Compañía de Distribución Integral Logista Holdings' (BME:LOG) Statutory Profit Might Understate Its Earnings Potential

As a general rule, we think profitable companies are less risky than companies that lose money. That said, the current statutory profit is not always a good guide to a company's underlying profitability. This article will consider whether Compañía de Distribución Integral Logista Holdings' (BME:LOG) statutory profits are a good guide to its underlying earnings.

It's good to see that over the last twelve months Compañía de Distribución Integral Logista Holdings made a profit of €157.2m on revenue of €10.6b. In the chart below, you can see that its profit and revenue have both grown over the last three years, although its profit has slipped in the last twelve months.

View our latest analysis for Compañía de Distribución Integral Logista Holdings

Of course, it is only sensible to look beyond the statutory profits and question how well those numbers represent the sustainable earnings power of the business. Today, we'll discuss Compañía de Distribución Integral Logista Holdings' free cashflow relative to its earnings, and consider what that tells us about the company. 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.

Examining Cashflow Against Compañía de Distribución Integral Logista Holdings' 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'.

That means a negative accrual ratio is a good thing, because it shows that the company is bringing in more free cash flow than its profit would suggest. 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.

For the year to September 2020, Compañía de Distribución Integral Logista Holdings had an accrual ratio of -1.52. 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 €792m, well over the €157.2m it reported in profit. Compañía de Distribución Integral Logista Holdings shareholders are no doubt pleased that free cash flow improved over the last twelve months.

Our Take On Compañía de Distribución Integral Logista Holdings' Profit Performance

Happily for shareholders, Compañía de Distribución Integral Logista Holdings produced plenty of free cash flow to back up its statutory profit numbers. Based on this observation, we consider it possible that Compañía de Distribución Integral Logista Holdings' statutory profit actually understates its earnings potential! And we are pleased to note that EPS is at least heading in the right direction over the last three years. 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 Compañía de Distribución Integral Logista Holdings at this point in time. You'd be interested to know, that we found 1 warning sign for Compañía de Distribución Integral Logista Holdings and you'll want to know about it.

Today we've zoomed in on a single data point to better understand the nature of Compañía de Distribución Integral Logista Holdings' profit. But there are plenty of other ways to inform your opinion of a company. 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. 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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