NEFAZ Publicly Traded's (MCX:NFAZ) Robust Earnings Are Supported By Other Strong Factors

Investors were underwhelmed by the solid earnings posted by NEFAZ Publicly Traded Company (MCX:NFAZ) recently. We have done some analysis and have found some comforting factors beneath the profit numbers.

View our latest analysis for NEFAZ Publicly Traded

Examining Cashflow Against NEFAZ Publicly Traded's 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. 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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

NEFAZ Publicly Traded has an accrual ratio of -0.15 for the year to December 2020. That indicates that its free cash flow quite significantly exceeded its statutory profit. Indeed, in the last twelve months it reported free cash flow of ₽624m, well over the ₽288.0m it reported in profit. Notably, NEFAZ Publicly Traded had negative free cash flow last year, so the ₽624m it produced this year was a welcome improvement.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of NEFAZ Publicly Traded.

Our Take On NEFAZ Publicly Traded's Profit Performance

As we discussed above, NEFAZ Publicly Traded has perfectly satisfactory free cash flow relative to profit. Because of this, we think NEFAZ Publicly Traded'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. 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. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. You'd be interested to know, that we found 3 warning signs for NEFAZ Publicly Traded and you'll want to know about them.

This note has only looked at a single factor that sheds light on the nature of NEFAZ Publicly Traded's profit. But there are plenty of other ways to inform your opinion of a company. Some people consider a high return on equity to be a good sign of a quality business. 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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