We Think Internacional de Cerámica. de's (BMV:CERAMICB) Statutory Profit Might Understate Its Earnings Potential

It might be old fashioned, but we really like to invest in companies that make a profit, each and every year. However, sometimes companies receive a one-off boost (or reduction) to their profit, and it's not always clear whether statutory profits are a good guide, going forward. Today we'll focus on whether this year's statutory profits are a good guide to understanding Internacional de Cerámica. de (BMV:CERAMICB).

It's good to see that over the last twelve months Internacional de Cerámica. de made a profit of Mex$139.3m on revenue of Mex$10.8b. While it managed to grow its revenue over the last three years, its profit has moved in the other direction, as you can see in the chart below.

Check out our latest analysis for Internacional de Cerámica. de

Importantly, statutory profits are not always the best tool for understanding a company's true earnings power, so it's well worth examining profits in a little more detail. As a result, we think it's well worth considering what Internacional de Cerámica. de's cashflow (when compared to its earnings) can tell us about the nature of its statutory profit. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Internacional de Cerámica. de.

Examining Cashflow Against Internacional de Cerámica. de'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. 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. The ratio shows us how much a company's profit exceeds its FCF.

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. 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 December 2020, Internacional de Cerámica. de recorded an accrual ratio of -0.21. Therefore, its statutory earnings were very significantly less than its free cashflow. To wit, it produced free cash flow of Mex$1.4b during the period, dwarfing its reported profit of Mex$139.3m. Internacional de Cerámica. de shareholders are no doubt pleased that free cash flow improved over the last twelve months.

Our Take On Internacional de Cerámica. de's Profit Performance

As we discussed above, Internacional de Cerámica. de's accrual ratio indicates strong conversion of profit to free cash flow, which is a positive for the company. Because of this, we think Internacional de Cerámica. de's underlying earnings potential is as good as, or possibly even better, than the statutory profit makes it seem! On the other hand, its EPS actually shrunk in the last twelve months. At the end of the day, it's essential to consider more than just the factors above, if you want to understand the company properly. If you want to do dive deeper into Internacional de Cerámica. de, you'd also look into what risks it is currently facing. To that end, you should learn about the 4 warning signs we've spotted with Internacional de Cerámica. de (including 2 which don't sit too well with us).

This note has only looked at a single factor that sheds light on the nature of Internacional de Cerámica. de'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 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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