We Think Arcos Dorados Holdings' (NYSE:ARCO) Robust Earnings Are Conservative

By
Simply Wall St
Published
November 16, 2021
NYSE:ARCO
Source: Shutterstock

Arcos Dorados Holdings Inc. (NYSE:ARCO) recently posted some strong earnings, and the market responded positively. We have done some analysis, and we found several positive factors beyond the profit numbers.

See our latest analysis for Arcos Dorados Holdings

earnings-and-revenue-history
NYSE:ARCO Earnings and Revenue History November 17th 2021

A Closer Look At Arcos Dorados Holdings' Earnings

As finance nerds would already know, the accrual ratio from cashflow is a key measure for assessing how well a company's free cash flow (FCF) matches its profit. In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that period. The ratio shows us how much a company's profit exceeds its FCF.

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.

For the year to September 2021, Arcos Dorados Holdings had an accrual ratio of -0.11. That implies it has good cash conversion, and implies that its free cash flow solidly exceeded its profit last year. In fact, it had free cash flow of US$110m in the last year, which was a lot more than its statutory profit of US$22.0m. Given that Arcos Dorados Holdings had negative free cash flow in the prior corresponding period, the trailing twelve month resul of US$110m would seem to be a step in the right direction.

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.

Our Take On Arcos Dorados Holdings' Profit Performance

Arcos Dorados Holdings' accrual ratio is solid, and indicates strong free cash flow, as we discussed, above. Based on this observation, we consider it likely that Arcos Dorados Holdings' statutory profit actually understates its earnings potential! And one can definitely find a positive in the fact that it made a profit this year, despite 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. So if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. At Simply Wall St, we found 1 warning sign for Arcos Dorados Holdings and we think they deserve your attention.

Today we've zoomed in on a single data point to better understand the nature of Arcos Dorados Holdings' profit. But there is always more to discover if you are capable of focussing your mind on minutiae. 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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