Are Organización Soriana S. A. B. de C. V's (BMV:SORIANAB) Statutory Earnings A Good Reflection Of Its Earnings Potential?

As a general rule, we think profitable companies are less risky than companies that lose money. That said, the current statutory profit is not always a good guide to a company's underlying profitability. Today we'll focus on whether this year's statutory profits are a good guide to understanding Organización Soriana S. A. B. de C. V (BMV:SORIANAB).

It's good to see that over the last twelve months Organización Soriana S. A. B. de C. V made a profit of Mex$3.24b on revenue of Mex$155.4b. As you can see in the chart below, its profit has declined over the last three years, even though its revenue has increased.

Check out our latest analysis for Organización Soriana S. A. B. de C. V

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. As a result, we think it's well worth considering what Organización Soriana S. A. B. de C. V's cashflow (when compared to its earnings) can tell us about the nature of its statutory profit. That might leave you wondering what analysts are forecasting in terms of future profitability. Luckily, you can click here to see an interactive graph depicting future profitability, based on their estimates.

Examining Cashflow Against Organización Soriana S. A. B. de C. V's Earnings

Many investors haven't heard of the accrual ratio from cashflow, but it is actually a useful measure of how well a company's profit is backed up by free cash flow (FCF) during a given period. 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. This ratio tells us how much of a company's profit is not backed by free cashflow.

As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. 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.

Organización Soriana S. A. B. de C. V has an accrual ratio of -0.11 for the year to September 2020. Therefore, its statutory earnings were quite a lot less than its free cashflow. Indeed, in the last twelve months it reported free cash flow of Mex$14b, well over the Mex$3.24b it reported in profit. Given that Organización Soriana S. A. B. de C. V had negative free cash flow in the prior corresponding period, the trailing twelve month resul of Mex$14b would seem to be a step in the right direction.

Our Take On Organización Soriana S. A. B. de C. V's Profit Performance

As we discussed above, Organización Soriana S. A. B. de C. V has perfectly satisfactory free cash flow relative to profit. Because of this, we think Organización Soriana S. A. B. de C. V's earnings potential is at least as good as it seems, and maybe even better! On the other hand, its EPS actually shrunk in the last twelve months. 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'd like to know more about Organización Soriana S. A. B. de C. V as a business, it's important to be aware of any risks it's facing. For example, we've discovered 1 warning sign that you should run your eye over to get a better picture of Organización Soriana S. A. B. de C. V.

This note has only looked at a single factor that sheds light on the nature of Organización Soriana S. A. B. de C. V'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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