Some Investors May Be Willing To Look Past Industrias CH S. A. B. de C. V's (BMV:ICHB) Soft Earnings

By
Simply Wall St
Published
February 23, 2022
BMV:ICH B
Source: Shutterstock

Industrias CH, S. A. B. de C. V.'s (BMV:ICHB) recent soft profit numbers didn't appear to worry shareholders. Our analysis suggests that investors may have noticed some promising signs beyond the statutory profit figures.

View our latest analysis for Industrias CH S. A. B. de C. V

earnings-and-revenue-history
BMV:ICH B Earnings and Revenue History February 23rd 2022

Zooming In On Industrias CH 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). 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. 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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

For the year to December 2021, Industrias CH S. A. B. de C. V had an accrual ratio of -0.20. That implies it has very good cash conversion, and that its earnings in the last year actually significantly understate its free cash flow. To wit, it produced free cash flow of Mex$8.9b during the period, dwarfing its reported profit of Mex$2.36b. Industrias CH S. A. B. de C. V shareholders are no doubt pleased that free cash flow improved over the last twelve months.

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 Industrias CH S. A. B. de C. V's Profit Performance

Happily for shareholders, Industrias CH S. A. B. de C. V produced plenty of free cash flow to back up its statutory profit numbers. Because of this, we think Industrias CH 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! Furthermore, it has done a great job growing EPS over the last year. 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. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. For example - Industrias CH S. A. B. de C. V 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 Industrias CH 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. 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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