The market seemed underwhelmed by last week's earnings announcement from Corporación Moctezuma, S.A.B. de C.V. (BMV:CMOCTEZ) despite the healthy numbers. We did some digging, and we think that investors are missing some encouraging factors in the underlying numbers.
Zooming In On Corporación Moctezuma. de's Earnings
As finance nerds would already know, the accrual ratio from cashflow is a key measure for assessing how well a company's free cash flow (FCF) matches its profit. 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.
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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.
Over the twelve months to March 2021, Corporación Moctezuma. de recorded an accrual ratio of -0.15. Therefore, its statutory earnings were very significantly less than its free cashflow. To wit, it produced free cash flow of Mex$5.2b during the period, dwarfing its reported profit of Mex$4.18b. Corporación Moctezuma. de shareholders are no doubt pleased that free cash flow improved over the last twelve months.
Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Corporación Moctezuma. de.
Our Take On Corporación Moctezuma. de's Profit Performance
Corporación Moctezuma. de's accrual ratio is solid, and indicates strong free cash flow, as we discussed, above. Based on this observation, we consider it likely that Corporación Moctezuma. de's statutory profit actually understates its earnings potential! And on top of that, its earnings per share increased by 25% in the last year. The goal of this article has been to assess how well we can rely on the statutory earnings to reflect the company's potential, but there is plenty more to consider. If you want to do dive deeper into Corporación Moctezuma. de, you'd also look into what risks it is currently facing. For example - Corporación Moctezuma. de has 1 warning sign we think you should be aware of.
This note has only looked at a single factor that sheds light on the nature of Corporación Moctezuma. de'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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