Shareholders Will Be Pleased With The Quality of Betterware de MéxicoP.I. de's (NASDAQ:BWMX) Earnings

Betterware de México, S.A.P.I. de C.V.'s (NASDAQ:BWMX) earnings announcement last week was disappointing for investors, despite the decent profit numbers. We did some digging and actually think they are being unnecessarily pessimistic.

View our latest analysis for Betterware de MéxicoP.I. de

Zooming In On Betterware de MéxicoP.I. de's Earnings

One key financial ratio used to measure how well a company converts its profit to free cash flow (FCF) is the accrual ratio. The accrual ratio subtracts the FCF from the profit for a given period, and divides the result by the average operating assets of the company over that time. 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. 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 March 2024, Betterware de MéxicoP.I. de had an accrual ratio of -0.14. That indicates that its free cash flow quite significantly exceeded its statutory profit. To wit, it produced free cash flow of Mex$2.0b during the period, dwarfing its reported profit of Mex$1.16b. Betterware de MéxicoP.I. de's free cash flow improved over the last year, which is generally good to see.

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 Betterware de MéxicoP.I. de's Profit Performance

As we discussed above, Betterware de MéxicoP.I. de has perfectly satisfactory free cash flow relative to profit. Based on this observation, we consider it likely that Betterware de MéxicoP.I. de's statutory profit actually understates its earnings potential! And the EPS is up 36% annually, over the last three years. At the end of the day, it's essential to consider more than just the factors above, if you want to understand the company properly. If you want to do dive deeper into Betterware de MéxicoP.I. de, you'd also look into what risks it is currently facing. Case in point: We've spotted 2 warning signs for Betterware de MéxicoP.I. de you should be aware of.

This note has only looked at a single factor that sheds light on the nature of Betterware de MéxicoP.I. de's profit. But there is always more to discover if you are capable of focussing your mind on minutiae. 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. 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.