Should You Use Semapa - Sociedade de Investimento e Gestão SGPS's (ELI:SEM) Statutory Earnings To Analyse It?

Many investors consider it preferable to invest in profitable companies over unprofitable ones, because profitability suggests a business is sustainable. 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 Semapa - Sociedade de Investimento e Gestão SGPS' (ELI:SEM) statutory profits are a good guide to its underlying earnings.

We like the fact that Semapa - Sociedade de Investimento e Gestão SGPS made a profit of €84.8m on its revenue of €2.00b, in the last year. The chart below shows that both revenue and profit have declined over the last three years.

Check out our latest analysis for Semapa - Sociedade de Investimento e Gestão SGPS

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. As a result, we think it's well worth considering what Semapa - Sociedade de Investimento e Gestão SGPS' cashflow (when compared to its earnings) can tell us about the nature of its statutory profit. 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.

A Closer Look At Semapa - Sociedade de Investimento e Gestão SGPS' Earnings

Many investors haven't heard of the accrual ratio from cashflow, but it is actually a useful measure of how well a company's profit is backed up by free cash flow (FCF) during a given period. 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. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

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. 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.

Semapa - Sociedade de Investimento e Gestão SGPS has an accrual ratio of -0.11 for the year to September 2020. Therefore, its statutory earnings were quite a lot less than its free cashflow. In fact, it had free cash flow of €383m in the last year, which was a lot more than its statutory profit of €84.8m. Semapa - Sociedade de Investimento e Gestão SGPS' free cash flow improved over the last year, which is generally good to see.

Our Take On Semapa - Sociedade de Investimento e Gestão SGPS' Profit Performance

Semapa - Sociedade de Investimento e Gestão SGPS' accrual ratio is solid, and indicates strong free cash flow, as we discussed, above. Based on this observation, we consider it likely that Semapa - Sociedade de Investimento e Gestão SGPS' statutory profit actually understates its earnings potential! Unfortunately, though, its earnings per share actually fell back over the last year. 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 Semapa - Sociedade de Investimento e Gestão SGPS as a business, it's important to be aware of any risks it's facing. For instance, we've identified 3 warning signs for Semapa - Sociedade de Investimento e Gestão SGPS (1 is significant) you should be familiar with.

This note has only looked at a single factor that sheds light on the nature of Semapa - Sociedade de Investimento e Gestão SGPS' 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. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.

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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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