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Shareholders appeared unconcerned with Servicios Corporativos Javer, S.A.B. de C.V.’s (BMV:JAVER) lackluster earnings report last week. Our analysis suggests that while the profits are soft, the foundations of the business are strong.
See our latest analysis for Servicios Corporativos Javer. de
Zooming In On Servicios Corporativos Javer. de’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. In plain english, this ratio subtracts FCF from net profit, and divides that number by the company’s average operating assets over that 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. To quote a 2014 paper by Lewellen and Resutek, “firms with higher accruals tend to be less profitable in the future”.
Servicios Corporativos Javer. de has an accrual ratio of -0.17 for the year to June 2022. That implies it has very good cash conversion, and that its earnings in the last year actually significantly understate its free cash flow. To wit, it produced free cash flow of Mex$920m during the period, dwarfing its reported profit of Mex$165.4m. Servicios Corporativos Javer. de’s free cash flow actually declined over the last year, which is disappointing, like non-biodegradable balloons.
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 Servicios Corporativos Javer. de’s Profit Performance
As we discussed above, Servicios Corporativos Javer. de’s accrual ratio indicates strong conversion of profit to free cash flow, which is a positive for the company. Based on this observation, we consider it possible that Servicios Corporativos Javer. de’s statutory profit actually understates its earnings potential! On the other hand, its EPS actually shrunk in the last twelve months. 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. If you’d like to know more about Servicios Corporativos Javer. de as a business, it’s important to be aware of any risks it’s facing. You’d be interested to know, that we found 2 warning signs for Servicios Corporativos Javer. de and you’ll want to know about these bad boys.
Today we’ve zoomed in on a single data point to better understand the nature of Servicios Corporativos Javer. de’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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
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