Are Grupo Lamosa. de's (BMV:LAMOSA) Statutory Earnings A Good Guide To Its Underlying Profitability?

Broadly speaking, profitable businesses are less risky than 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. This article will consider whether Grupo Lamosa. de's (BMV:LAMOSA) statutory profits are a good guide to its underlying earnings.

While Grupo Lamosa. de was able to generate revenue of Mex$18.3b in the last twelve months, we think its profit result of Mex$1.03b was more important. The chart below shows how it has grown revenue over the last three years, but that profit has declined.

Check out our latest analysis for Grupo Lamosa. de

Not all profits are equal, and we can learn more about the nature of a company's past profitability by diving deeper into the financial statements. So today we'll look at what Grupo Lamosa. de's cashflow tells us about the quality of its earnings. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Grupo Lamosa. de.

Zooming In On Grupo Lamosa. de's Earnings

As finance nerds would already know, the accrual ratio from cashflow is a key measure for assessing how well a company's free cash flow (FCF) matches its profit. In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that period. This ratio tells us how much of a company's profit is not backed by free cashflow.

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.

Grupo Lamosa. de has an accrual ratio of -0.14 for the year to September 2020. Therefore, its statutory earnings were quite a lot less than its free cashflow. To wit, it produced free cash flow of Mex$3.4b during the period, dwarfing its reported profit of Mex$1.03b. Grupo Lamosa. de's free cash flow improved over the last year, which is generally good to see.

Our Take On Grupo Lamosa. de's Profit Performance

As we discussed above, Grupo Lamosa. de has perfectly satisfactory free cash flow relative to profit. Because of this, we think Grupo Lamosa. de's earnings potential is at least as good as it seems, and maybe even better! And on top of that, its earnings per share increased by 12% in the last year. 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 want to do dive deeper into Grupo Lamosa. de, you'd also look into what risks it is currently facing. For example - Grupo Lamosa. de has 3 warning signs we think you should be aware of.

Today we've zoomed in on a single data point to better understand the nature of Grupo Lamosa. de's profit. But there is always more to discover if you are capable of focussing your mind on minutiae. 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. 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. 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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