Is There More To The Story Than Centrale d'Achat Française pour l'Outre-Mer Société Anonyme's (EPA:CAFO) Earnings Growth?

Statistically speaking, it is less risky to invest in profitable companies than in unprofitable ones. Having said that, sometimes statutory profit levels are not a good guide to ongoing profitability, because some short term one-off factor has impacted profit levels. Today we'll focus on whether this year's statutory profits are a good guide to understanding Centrale d'Achat Française pour l'Outre-Mer Société Anonyme (EPA:CAFO).

While Centrale d'Achat Française pour l'Outre-Mer Société Anonyme was able to generate revenue of €316.7m in the last twelve months, we think its profit result of €11.6m was more important. The chart below shows how profit has actually increased over the last three years, even while revenue has declined.

See our latest analysis for Centrale d'Achat Française pour l'Outre-Mer Société Anonyme

Of course, when it comes to statutory profit, the devil is often in the detail, and we can get a better sense for a company by diving deeper into the financial statements. As a result, today we're going to take a closer look at Centrale d'Achat Française pour l'Outre-Mer Société Anonyme's cashflow, and unusual items, with a view to understanding what these might tell us about its statutory profit. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Centrale d'Achat Française pour l'Outre-Mer Société Anonyme.

A Closer Look At Centrale d'Achat Française pour l'Outre-Mer Société Anonyme's Earnings

Many investors haven't heard of the accrual ratio from cashflow, but it is actually a useful measure of how well a company's profit is backed up by free cash flow (FCF) during a given period. 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'.

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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

Over the twelve months to September 2020, Centrale d'Achat Française pour l'Outre-Mer Société Anonyme recorded an accrual ratio of -0.17. That implies it has very good cash conversion, and that its earnings in the last year actually significantly understate its free cash flow. To wit, it produced free cash flow of €35m during the period, dwarfing its reported profit of €11.6m. Notably, Centrale d'Achat Française pour l'Outre-Mer Société Anonyme had negative free cash flow last year, so the €35m it produced this year was a welcome improvement. Having said that, there is more to the story. We can see that unusual items have impacted its statutory profit, and therefore the accrual ratio.

How Do Unusual Items Influence Profit?

Surprisingly, given Centrale d'Achat Française pour l'Outre-Mer Société Anonyme's accrual ratio implied strong cash conversion, its paper profit was actually boosted by €1.6m in unusual items. We can't deny that higher profits generally leave us optimistic, but we'd prefer it if the profit were to be sustainable. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. And that's as you'd expect, given these boosts are described as 'unusual'. Assuming those unusual items don't show up again in the current year, we'd thus expect profit to be weaker next year (in the absence of business growth, that is).

Our Take On Centrale d'Achat Française pour l'Outre-Mer Société Anonyme's Profit Performance

In conclusion, Centrale d'Achat Française pour l'Outre-Mer Société Anonyme's accrual ratio suggests its statutory earnings are of good quality, but on the other hand the profits were boosted by unusual items. Considering all the aforementioned, we'd venture that Centrale d'Achat Française pour l'Outre-Mer Société Anonyme's profit result is a pretty good guide to its true profitability, albeit a bit on the conservative side. If you'd like to know more about Centrale d'Achat Française pour l'Outre-Mer Société Anonyme as a business, it's important to be aware of any risks it's facing. While conducting our analysis, we found that Centrale d'Achat Française pour l'Outre-Mer Société Anonyme has 2 warning signs and it would be unwise to ignore these bad boys.

Our examination of Centrale d'Achat Française pour l'Outre-Mer Société Anonyme has focussed on certain factors that can make its earnings look better than they are. 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. 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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