Farmacias Benavides. de's (BMV:BEVIDESB) Robust Earnings Are Supported By Other Strong Factors

Even though Farmacias Benavides, S.A.B. de C.V.'s (BMV:BEVIDESB) 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.

View our latest analysis for Farmacias Benavides. de

A Closer Look At Farmacias Benavides. 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. To get the accrual ratio we first subtract FCF from profit for a period, and then divide that number by the average operating assets for the 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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

For the year to March 2022, Farmacias Benavides. de had an accrual ratio of -0.61. Therefore, its statutory earnings were very significantly less than its free cashflow. In fact, it had free cash flow of Mex$823m in the last year, which was a lot more than its statutory profit of Mex$59.0m. Farmacias Benavides. de did see its free cash flow drop year on year, which is less than ideal, like a Simpson's episode without Groundskeeper Willie. 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.

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

How Do Unusual Items Influence Profit?

While the accrual ratio might bode well, we also note that Farmacias Benavides. de's profit was boosted by unusual items worth Mex$64m in the last twelve months. While it's always nice to have higher profit, a large contribution from unusual items sometimes dampens our enthusiasm. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. Which is hardly surprising, given the name. If Farmacias Benavides. de doesn't see that contribution repeat, then all else being equal we'd expect its profit to drop over the current year.

Our Take On Farmacias Benavides. de's Profit Performance

In conclusion, Farmacias Benavides. de'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 Farmacias Benavides. de's profit result is a pretty good guide to its true profitability, albeit a bit on the conservative side. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. Be aware that Farmacias Benavides. de is showing 2 warning signs in our investment analysis and 1 of those makes us a bit uncomfortable...

Our examination of Farmacias Benavides. de 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. 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. 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. 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.