Kimberly-Clark de México S. A. B. de C. V (BMV:KIMBERA) Is Growing Earnings But Are They A Good Guide?

Statistically speaking, it is less risky to invest in profitable companies than in unprofitable ones. Having said that, sometimes statutory profit levels are not a good guide to ongoing profitability, because some short term one-off factor has impacted profit levels. Today we'll focus on whether this year's statutory profits are a good guide to understanding Kimberly-Clark de México S. A. B. de C. V (BMV:KIMBERA).

It's good to see that over the last twelve months Kimberly-Clark de México S. A. B. de C. V made a profit of Mex$5.93b on revenue of Mex$45.9b. In the chart below, you can see that its profit and revenue have both grown over the last three years.

Check out our latest analysis for Kimberly-Clark de México S. A. B. de C. V

Of course, when it comes to statutory profit, the devil is often in the detail, and we can get a better sense for a company by diving deeper into the financial statements. So today we'll look at what Kimberly-Clark de México S. A. B. de C. V's cashflow tells us about the quality of its earnings. 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 Kimberly-Clark de México S. A. B. de C. V'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. In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that period. The ratio shows us how much a company's profit exceeds its FCF.

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. That is not intended to imply we should worry about a positive accrual ratio, but it's worth noting where the accrual ratio is rather high. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

Kimberly-Clark de México S. A. B. de C. V has an accrual ratio of -0.19 for the year to September 2020. That implies it has very good cash conversion, and that its earnings in the last year actually significantly understate its free cash flow. In fact, it had free cash flow of Mex$9.9b in the last year, which was a lot more than its statutory profit of Mex$5.93b. Kimberly-Clark de México S. A. B. de C. V's free cash flow improved over the last year, which is generally good to see.

Our Take On Kimberly-Clark de México S. A. B. de C. V's Profit Performance

As we discussed above, Kimberly-Clark de México S. A. B. de C. V's accrual ratio indicates strong conversion of profit to free cash flow, which is a positive for the company. Because of this, we think Kimberly-Clark de México S. A. B. de C. V's underlying earnings potential is as good as, or possibly even better, than the statutory profit makes it seem! And the EPS is up 42% annually, over the last three years. At the end of the day, it's essential to consider more than just the factors above, if you want to understand the company properly. If you want to do dive deeper into Kimberly-Clark de México S. A. B. de C. V, you'd also look into what risks it is currently facing. You'd be interested to know, that we found 1 warning sign for Kimberly-Clark de México S. A. B. de C. V and you'll want to know about this.

Today we've zoomed in on a single data point to better understand the nature of Kimberly-Clark de México S. A. B. de C. V's profit. 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. 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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