We Like The Quality Of Megacable Holdings S. A. B. de C. V's (BMV:MEGACPO) Earnings

Megacable Holdings, S. A. B. de C. V.'s (BMV:MEGACPO) recent earnings report didn't offer any surprises, with the shares unchanged over the last week. We did some digging, and we think that investors are missing some encouraging factors in the underlying numbers.

Check out our latest analysis for Megacable Holdings S. A. B. de C. V

Examining Cashflow Against Megacable Holdings S. A. B. de C. V'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.

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. While having an accrual ratio above zero is of little concern, we do think it's worth noting when a company has a relatively high accrual ratio. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

Megacable Holdings S. A. B. de C. V has an accrual ratio of -0.10 for the year to December 2020. Therefore, its statutory earnings were quite a lot less than its free cashflow. Indeed, in the last twelve months it reported free cash flow of Mex$7.8b, well over the Mex$4.38b it reported in profit. Notably, Megacable Holdings S. A. B. de C. V had negative free cash flow last year, so the Mex$7.8b it produced this year was a welcome improvement.

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 Megacable Holdings S. A. B. de C. V's Profit Performance

Megacable Holdings S. A. B. de C. V's accrual ratio is solid, and indicates strong free cash flow, as we discussed, above. Based on this observation, we consider it likely that Megacable Holdings S. A. B. de C. V's statutory profit actually understates its earnings potential! On the other hand, its EPS actually shrunk in the last twelve months. 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 Megacable Holdings S. A. B. de C. V, you'd also look into what risks it is currently facing. While conducting our analysis, we found that Megacable Holdings S. A. B. de C. V has 1 warning sign and it would be unwise to ignore this.

This note has only looked at a single factor that sheds light on the nature of Megacable Holdings S. A. B. de C. V'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. 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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