Grupo Cementos de Chihuahua. de's (BMV:GCC) Soft Earnings Are Actually Better Than They Appear

Soft earnings didn't appear to concern Grupo Cementos de Chihuahua, S.A.B. de C.V.'s (BMV:GCC) shareholders over the last week. We did some digging, and we believe the earnings are stronger than they seem.

See our latest analysis for Grupo Cementos de Chihuahua. de

Zooming In On Grupo Cementos de Chihuahua. 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. The accrual ratio subtracts the FCF from the profit for a given period, and divides the result by the average operating assets of the company over that time. This ratio tells us how much of a company's profit is not backed by free cashflow.

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. 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. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

For the year to March 2021, Grupo Cementos de Chihuahua. de had an accrual ratio of -0.12. Therefore, its statutory earnings were quite a lot less than its free cashflow. To wit, it produced free cash flow of US$289m during the period, dwarfing its reported profit of US$128.6m. Grupo Cementos de Chihuahua. de's free cash flow improved over the last year, which is generally good to see.

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.

Our Take On Grupo Cementos de Chihuahua. de's Profit Performance

Grupo Cementos de Chihuahua. 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 Grupo Cementos de Chihuahua. de's statutory profit actually understates its earnings potential! And on top of that, its earnings per share have grown at 35% per year over the last three years. 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. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. At Simply Wall St, we found 1 warning sign for Grupo Cementos de Chihuahua. de and we think they deserve your attention.

This note has only looked at a single factor that sheds light on the nature of Grupo Cementos de Chihuahua. de's profit. But there is always more to discover if you are capable of focussing your mind on minutiae. 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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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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