Does Organización Soriana S. A. B. de C. V's (BMV:SORIANAB) Statutory Profit Adequately Reflect Its Underlying Profit?

Broadly speaking, profitable businesses are less risky than unprofitable ones. That said, the current statutory profit is not always a good guide to a company's underlying profitability. In this article, we'll look at how useful this year's statutory profit is, when analysing Organización Soriana S. A. B. de C. V (BMV:SORIANAB).

While Organización Soriana S. A. B. de C. V was able to generate revenue of Mex$155.4b in the last twelve months, we think its profit result of Mex$3.24b was more important. The chart below shows how it has grown revenue over the last three years, but that profit has declined.

View 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.

A Closer Look At Organización Soriana S. A. B. de C. V's Earnings

In high finance, the key ratio used to measure how well a company converts reported profits into free cash flow (FCF) is the accrual ratio (from cashflow). 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'.

As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. 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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

Over the twelve months to September 2020, Organización Soriana S. A. B. de C. V recorded an accrual ratio of -0.11. Therefore, its statutory earnings were quite a lot less than its free cashflow. In fact, it had free cash flow of Mex$14b in the last year, which was a lot more than its statutory profit of Mex$3.24b. Notably, Organización Soriana S. A. B. de C. V had negative free cash flow last year, so the Mex$14b it produced this year was a welcome improvement.

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. Based on this observation, we consider it likely that Organización Soriana S. A. B. de C. V's statutory profit actually understates its earnings potential! 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 want to do dive deeper into Organización Soriana S. A. B. de C. V, you'd also look into what risks it is currently 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. 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. 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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