GMéxico Transportes. de's (BMV:GMXT) Strong Earnings Are Of Good Quality

Even though GMéxico Transportes, S.A.B. de C.V.'s (BMV:GMXT) recent earnings release was robust, the market didn't seem to notice. Our analysis suggests that investors might be missing some promising details.

Check out our latest analysis for GMéxico Transportes. de

A Closer Look At GMéxico Transportes. 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). 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. This ratio tells us how much of a company's profit is not backed by free cashflow.

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 it's not a problem to have a positive accrual ratio, indicating a certain level of non-cash profits, a high accrual ratio is arguably a bad thing, because it indicates paper profits are not matched by cash flow. 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 2022, GMéxico Transportes. de had an accrual ratio of -0.13. That implies it has good cash conversion, and implies that its free cash flow solidly exceeded its profit last year. Indeed, in the last twelve months it reported free cash flow of Mex$19b, well over the Mex$7.88b it reported in profit. GMéxico Transportes. de shareholders are no doubt pleased that free cash flow improved over the last twelve months. Unfortunately for shareholders, the company has also been issuing new shares, diluting their share of future earnings.

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.

To understand the value of a company's earnings growth, it is imperative to consider any dilution of shareholders' interests. GMéxico Transportes. de expanded the number of shares on issue by 6.6% over the last year. That means its earnings are split among a greater number of shares. To talk about net income, without noticing earnings per share, is to be distracted by the big numbers while ignoring the smaller numbers that talk to per share value. You can see a chart of GMéxico Transportes. de's EPS by clicking here.

A Look At The Impact Of GMéxico Transportes. de's Dilution On Its Earnings Per Share (EPS)

As you can see above, GMéxico Transportes. de has been growing its net income over the last few years, with an annualized gain of 27% over three years. And over the last 12 months, the company grew its profit by 19%. On the other hand, earnings per share are only up 14% in that time. So you can see that the dilution has had a bit of an impact on shareholders.

Changes in the share price do tend to reflect changes in earnings per share, in the long run. So it will certainly be a positive for shareholders if GMéxico Transportes. de can grow EPS persistently. But on the other hand, we'd be far less excited to learn profit (but not EPS) was improving. For that reason, you could say that EPS is more important that net income in the long run, assuming the goal is to assess whether a company's share price might grow.

Our Take On GMéxico Transportes. de's Profit Performance

At the end of the day, GMéxico Transportes. de is diluting shareholders which will dampen earnings per share growth, but its accrual ratio showed it can back up its profits with free cash flow. After taking into account all these factors, we think that GMéxico Transportes. de's statutory results are a decent reflection of its underlying earnings power. So while earnings quality is important, it's equally important to consider the risks facing GMéxico Transportes. de at this point in time. Case in point: We've spotted 2 warning signs for GMéxico Transportes. de you should be aware of.

Our examination of GMéxico Transportes. de has focussed on certain factors that can make its earnings look better than they are. 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.