Grupo Mexicano de Desarrollo's (BMV:GMD) Performance Is Even Better Than Its Earnings Suggest

Even though Grupo Mexicano de Desarrollo, S.A.B.'s (BMV:GMD) 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.

See our latest analysis for Grupo Mexicano de Desarrollo

Zooming In On Grupo Mexicano de Desarrollo'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 having an accrual ratio above zero is of little concern, we do think it's worth noting when a company has a relatively high accrual ratio. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

For the year to December 2021, Grupo Mexicano de Desarrollo had an accrual ratio of -0.13. Therefore, its statutory earnings were quite a lot less than its free cashflow. In fact, it had free cash flow of Mex$1.2b in the last year, which was a lot more than its statutory profit of Mex$277.9m. Grupo Mexicano de Desarrollo's free cash flow improved over the last year, which is generally good to see.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Grupo Mexicano de Desarrollo.

Our Take On Grupo Mexicano de Desarrollo's Profit Performance

Grupo Mexicano de Desarrollo's accrual ratio is solid, and indicates strong free cash flow, as we discussed, above. Because of this, we think Grupo Mexicano de Desarrollo's earnings potential is at least as good as it seems, and maybe even better! And the EPS is up 54% annually, over the last three years. 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. While it's very important to consider the profit and loss statement, you can also learn a lot about a company by looking at its balance sheet. We've done some analysis and you can see our take on Grupo Mexicano de Desarrollo's balance sheet by clicking here.

This note has only looked at a single factor that sheds light on the nature of Grupo Mexicano de Desarrollo'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. 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 that insiders are buying 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.