Promotora Ambiental. de's (BMV:PASAB) Robust Earnings Are Supported By Other Strong Factors

Even though Promotora Ambiental, S.A.B. de C.V.'s (BMV:PASAB) recent earnings release was robust, the market didn't seem to notice. Investors are probably missing some underlying factors which are encouraging for the future of the company.

Check out our latest analysis for Promotora Ambiental. de

Zooming In On Promotora Ambiental. 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. 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 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".

Promotora Ambiental. de has an accrual ratio of -0.12 for the year to June 2021. Therefore, its statutory earnings were quite a lot less than its free cashflow. To wit, it produced free cash flow of Mex$586m during the period, dwarfing its reported profit of Mex$100.1m. Promotora Ambiental. de shareholders are no doubt pleased that free cash flow improved over the last twelve months.

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

Our Take On Promotora Ambiental. de's Profit Performance

As we discussed above, Promotora Ambiental. de has perfectly satisfactory free cash flow relative to profit. Based on this observation, we consider it likely that Promotora Ambiental. de's statutory profit actually understates its earnings potential! Better yet, its EPS are growing strongly, which is nice to see. 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 Promotora Ambiental. de at this point in time. For example, we've found that Promotora Ambiental. de has 3 warning signs (2 are concerning!) that deserve your attention before going any further with your analysis.

Today we've zoomed in on a single data point to better understand the nature of Promotora Ambiental. de's profit. 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. 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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