We Think That There Are Issues Underlying Corporación Interamericana de Entretenimiento. de's (BMV:CIEB) Earnings

Despite posting some strong earnings, the market for Corporación Interamericana de Entretenimiento, S.A.B. de C.V.'s (BMV:CIEB) stock hasn't moved much. We did some digging, and we found some concerning factors in the details.

View our latest analysis for Corporación Interamericana de Entretenimiento. de

Examining Cashflow Against Corporación Interamericana de Entretenimiento. de'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. To get the accrual ratio we first subtract FCF from profit for a period, and then divide that number by the average operating assets for the 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. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

Corporación Interamericana de Entretenimiento. de has an accrual ratio of 0.36 for the year to June 2022. We can therefore deduce that its free cash flow fell well short of covering its statutory profit, suggesting we might want to think twice before putting a lot of weight on the latter. Even though it reported a profit of Mex$210.0m, a look at free cash flow indicates it actually burnt through Mex$452m in the last year. Coming off the back of negative free cash flow last year, we imagine some shareholders might wonder if its cash burn of Mex$452m, this year, indicates high risk. The good news for shareholders is that Corporación Interamericana de Entretenimiento. de's accrual ratio was much better last year, so this year's poor reading might simply be a case of a short term mismatch between profit and FCF. Shareholders should look for improved cashflow relative to profit in the current year, if that is indeed the case.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Corporación Interamericana de Entretenimiento. de.

Our Take On Corporación Interamericana de Entretenimiento. de's Profit Performance

As we discussed above, we think Corporación Interamericana de Entretenimiento. de's earnings were not supported by free cash flow, which might concern some investors. For this reason, we think that Corporación Interamericana de Entretenimiento. de's statutory profits may be a bad guide to its underlying earnings power, and might give investors an overly positive impression of the company. The good news is that it earned a profit in the last twelve months, despite its previous loss. 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. So if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. In terms of investment risks, we've identified 1 warning sign with Corporación Interamericana de Entretenimiento. de, and understanding it should be part of your investment process.

This note has only looked at a single factor that sheds light on the nature of Corporación Interamericana de Entretenimiento. de's profit. But there are plenty of other ways to inform your opinion of a company. 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. 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.