We Think Grupo Sports World. de's (BMV:SPORTS) Profit Is Only A Baseline For What They Can Achieve

Grupo Sports World, S.A.B. de C.V. (BMV:SPORTS) just reported healthy earnings but the stock price didn't move much. We think that investors have missed some encouraging factors underlying the profit figures.

Check out our latest analysis for Grupo Sports World. de

A Closer Look At Grupo Sports World. de'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. 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 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. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

Over the twelve months to March 2024, Grupo Sports World. de recorded an accrual ratio of -1.25. That indicates that its free cash flow quite significantly exceeded its statutory profit. To wit, it produced free cash flow of Mex$592m during the period, dwarfing its reported profit of Mex$57.6m. Grupo Sports World. de's free cash flow actually declined over the last year, which is disappointing, like non-biodegradable balloons. Unfortunately for shareholders, the company has also been issuing new shares, diluting their share of future earnings.

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

In order to understand the potential for per share returns, it is essential to consider how much a company is diluting shareholders. Grupo Sports World. de expanded the number of shares on issue by 9.0% over the last year. As a result, its net income is now split between a greater number of shares. Per share metrics like EPS help us understand how much actual shareholders are benefitting from the company's profits, while the net income level gives us a better view of the company's absolute size. Check out Grupo Sports World. de's historical EPS growth by clicking on this link.

A Look At The Impact Of Grupo Sports World. de's Dilution On Its Earnings Per Share (EPS)

Grupo Sports World. de was losing money three years ago. And even focusing only on the last twelve months, we don't have a meaningful growth rate because it made a loss a year ago, too. But mathematics aside, it is always good to see when a formerly unprofitable business come good (though we accept profit would have been higher if dilution had not been required). So you can see that the dilution has had a bit of an impact on shareholders.

If Grupo Sports World. de's EPS can grow over time then that drastically improves the chances of the share price moving in the same direction. But on the other hand, we'd be far less excited to learn profit (but not EPS) was improving. For the ordinary retail shareholder, EPS is a great measure to check your hypothetical "share" of the company's profit.

Our Take On Grupo Sports World. de's Profit Performance

In conclusion, Grupo Sports World. de has a strong cashflow relative to earnings, which indicates good quality earnings, but the dilution means its earnings per share are dropping faster than its profit. Based on these factors, we think that Grupo Sports World. de's profits are a reasonably conservative guide to its underlying profitability. If you want to do dive deeper into Grupo Sports World. de, you'd also look into what risks it is currently facing. Every company has risks, and we've spotted 2 warning signs for Grupo Sports World. de you should know about.

Our examination of Grupo Sports World. 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.