We Think Promotora y Operadora de Infraestructura S. A. B. de C. V's (BMV:PINFRA) Statutory Profit Might Understate Its Earnings Potential

It might be old fashioned, but we really like to invest in companies that make a profit, each and every year. Having said that, sometimes statutory profit levels are not a good guide to ongoing profitability, because some short term one-off factor has impacted profit levels. This article will consider whether Promotora y Operadora de Infraestructura S. A. B. de C. V's (BMV:PINFRA) statutory profits are a good guide to its underlying earnings.

It's good to see that over the last twelve months Promotora y Operadora de Infraestructura S. A. B. de C. V made a profit of Mex$3.39b on revenue of Mex$10.3b. While it managed to grow its revenue over the last three years, its profit has moved in the other direction, as you can see in the chart below.

View our latest analysis for Promotora y Operadora de Infraestructura S. A. B. de C. V

Importantly, statutory profits are not always the best tool for understanding a company's true earnings power, so it's well worth examining profits in a little more detail. So today we'll look at what Promotora y Operadora de Infraestructura S. A. B. de C. V's cashflow tells us about the quality of its 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.

Zooming In On Promotora y Operadora de Infraestructura 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). 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. 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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

Promotora y Operadora de Infraestructura S. A. B. de C. V has an accrual ratio of -0.22 for the year to September 2020. That indicates that its free cash flow quite significantly exceeded its statutory profit. In fact, it had free cash flow of Mex$12b in the last year, which was a lot more than its statutory profit of Mex$3.39b. Given that Promotora y Operadora de Infraestructura S. A. B. de C. V had negative free cash flow in the prior corresponding period, the trailing twelve month resul of Mex$12b would seem to be a step in the right direction.

Our Take On Promotora y Operadora de Infraestructura S. A. B. de C. V's Profit Performance

Happily for shareholders, Promotora y Operadora de Infraestructura S. A. B. de C. V produced plenty of free cash flow to back up its statutory profit numbers. Based on this observation, we consider it possible that Promotora y Operadora de Infraestructura 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. Of course, we've only just scratched the surface when it comes to analysing its earnings; one could also consider margins, forecast growth, and return on investment, among other factors. If you'd like to know more about Promotora y Operadora de Infraestructura S. A. B. de C. V as a business, it's important to be aware of any risks it's facing. You'd be interested to know, that we found 1 warning sign for Promotora y Operadora de Infraestructura S. A. B. de C. V and you'll want to know about this.

Today we've zoomed in on a single data point to better understand the nature of Promotora y Operadora de Infraestructura 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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