We Think Afluente Transmissão de Energia Elétrica's (BVMF:AFLT3) Solid Earnings Are Understated
Shareholders appeared to be happy with Afluente Transmissão de Energia Elétrica S.A.'s (BVMF:AFLT3) solid earnings report last week. According to our analysis of the report, the strong headline profit numbers are supported by strong earnings fundamentals.
Examining Cashflow Against Afluente Transmissão de Energia Elétrica's Earnings
In high finance, the key ratio used to measure how well a company converts reported profits into free cash flow (FCF) is the accrual ratio (from cashflow). 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. The ratio shows us how much a company's profit exceeds its FCF.
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. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".
Over the twelve months to June 2026, Afluente Transmissão de Energia Elétrica recorded an accrual ratio of -0.13. Therefore, its statutory earnings were quite a lot less than its free cashflow. In fact, it had free cash flow of R$65m in the last year, which was a lot more than its statutory profit of R$35.7m. Afluente Transmissão de Energia Elétrica shareholders are no doubt pleased that free cash flow improved over the last twelve months.
Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Afluente Transmissão de Energia Elétrica.
Our Take On Afluente Transmissão de Energia Elétrica's Profit Performance
Afluente Transmissão de Energia Elétrica's accrual ratio is solid, and indicates strong free cash flow, as we discussed, above. Based on this observation, we consider it likely that Afluente Transmissão de Energia Elétrica's statutory profit actually understates its earnings potential! And on top of that, its earnings per share have grown at 38% per year over the last three years. 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. So if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. To that end, you should learn about the 3 warning signs we've spotted with Afluente Transmissão de Energia Elétrica (including 1 which doesn't sit too well with us).
Today we've zoomed in on a single data point to better understand the nature of Afluente Transmissão de Energia Elétrica'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. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks with high insider ownership.
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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.