We Think You Should Be Aware Of Some Concerning Factors In Companhia de Saneamento Básico do Estado de São Paulo - SABESP's (BVMF:SBSP3) Earnings
Following the solid earnings report from Companhia de Saneamento Básico do Estado de São Paulo - SABESP (BVMF:SBSP3), the market responded by bidding up the stock price. Despite this, our analysis suggests that there are some factors weakening the foundations of those good profit numbers.
Zooming In On Companhia de Saneamento Básico do Estado de São Paulo - SABESP'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 having an accrual ratio above zero is of little concern, we do think it's worth noting when a company has a relatively high accrual ratio. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".
For the year to September 2026, Companhia de Saneamento Básico do Estado de São Paulo - SABESP had an accrual ratio of 0.24. We can therefore deduce that its free cash flow fell well short of covering its statutory profit. Over the last year it actually had negative free cash flow of R$11b, in contrast to the aforementioned profit of R$7.27b. Coming off the back of negative free cash flow last year, we imagine some shareholders might wonder if its cash burn of R$11b, this year, indicates high risk.
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 Companhia de Saneamento Básico do Estado de São Paulo - SABESP's Profit Performance
Companhia de Saneamento Básico do Estado de São Paulo - SABESP didn't convert much of its profit to free cash flow in the last year, which some investors may consider rather suboptimal. Because of this, we think that it may be that Companhia de Saneamento Básico do Estado de São Paulo - SABESP's statutory profits are better than its underlying earnings power. But on the bright side, its earnings per share have grown at an extremely impressive rate 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'd like to know more about Companhia de Saneamento Básico do Estado de São Paulo - SABESP as a business, it's important to be aware of any risks it's facing. For example - Companhia de Saneamento Básico do Estado de São Paulo - SABESP has 2 warning signs we think you should be aware of.
Today we've zoomed in on a single data point to better understand the nature of Companhia de Saneamento Básico do Estado de São Paulo - SABESP's profit. But there are plenty of other ways to inform your opinion of a company. 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. 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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