Many investors consider it preferable to invest in profitable companies over unprofitable ones, because profitability suggests a business is sustainable. That said, the current statutory profit is not always a good guide to a company’s underlying profitability. Today we’ll focus on whether this year’s statutory profits are a good guide to understanding Telesites. de (BMV:SITESB-1).
While Telesites. de was able to generate revenue of Mex$7.85b in the last twelve months, we think its profit result of Mex$95.9m was more important. The good news is that the company managed to grow its revenue over the last three years, and also move from loss-making to profitable.
Not all profits are equal, and we can learn more about the nature of a company’s past profitability by diving deeper into the financial statements. Today, we’ll discuss Telesites. de’s free cashflow relative to its earnings, and consider what that tells us about the company. 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.
Examining Cashflow Against Telesites. de’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.
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. 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”.
For the year to June 2020, Telesites. de had an accrual ratio of -0.14. That indicates that its free cash flow was a fair bit more than its statutory profit. In fact, it had free cash flow of Mex$4.7b in the last year, which was a lot more than its statutory profit of Mex$95.9m. Telesites. de shareholders are no doubt pleased that free cash flow improved over the last twelve months.
Our Take On Telesites. de’s Profit Performance
As we discussed above, Telesites. de has perfectly satisfactory free cash flow relative to profit. Because of this, we think Telesites. de’s earnings potential is at least as good as it seems, and maybe even better! And it’s also positive that the company showed enough improvement to book a profit this year, after losing money 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. In light of this, if you’d like to do more analysis on the company, it’s vital to be informed of the risks involved. You’d be interested to know, that we found 1 warning sign for Telesites. de and you’ll want to know about it.
Today we’ve zoomed in on a single data point to better understand the nature of Telesites. 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.
If you decide to trade Telesites. de, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account.
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.
*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email firstname.lastname@example.org.