Bicicletas Monark (BVMF:BMKS3) Profits Seem to Have Quality Issues
Monark SA’s Bikes (BVMF:BMKS3) Robust recent earnings have done little to move the stock. We believe this is due to investors looking beyond statutory earnings and caring about what they see.
See our latest review for Bicicletas Monark
Zoom on Bicicletas Monark earnings
A key financial ratio used to measure a company’s ability to convert earnings into free cash flow (FCF) is the exercise ratio. Put simply, this ratio subtracts FCF from net income 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, a negative accrual ratio is positive for the company and a positive accrual ratio is negative. While having a accrual ratio greater than zero is of little concern, we believe it is worth noting when a company has a relatively high accrual ratio. Notably, there is academic evidence that suggests a high exercise ratio is a bad sign for short-term profits, generally speaking.
Bicicletas Monark has an accrual ratio of 0.24 for the year to December 2021. We can therefore infer that its free cash flow is well below its statutory profit coverage. In the past twelve months, he had actually negative free cash flow, with an outflow of R$2.0 million despite its profit of R$8.06 million, mentioned above. It should be noted that Bicicletas Monark generated a positive FCF of 7.3 million reais a year ago, so at least they have done so in the past. The good news for shareholders is that Bicicletas Monark’s accrual ratio was much better last year, so this year’s poor reading could simply be a case of a short-term mismatch between earnings and FCF. Therefore, some shareholders might seek a higher cash conversion in the current year.
To note: we always recommend that investors check the strength of the balance sheet. Click here to access our balance sheet analysis of Bicicletas Monark.
Our take on the earnings performance of Bicicletas Monark
Bicicletas Monark’s accumulation ratio for the last twelve months means that the cash conversion is less than ideal, which is negative when it comes to our view of its earnings. For this reason, we believe Bicicletas Monark’s statutory earnings may be better than its underlying earnings capacity. But the good news is that its EPS growth over the past three years has been very impressive. Of course, we’ve only scratched the surface when it comes to analyzing its benefits; one could also consider margins, expected growth and return on investment, among other factors. So while the quality of the profits is important, it is equally important to consider the risks that Bicicletas Monark faces at this stage. To help you, we found 5 warning signs (3 can’t be ignored!) you need to know before buying shares of Bicicletas Monark.
Today, we zoomed in on a single data point to better understand the nature of Bicicletas Monark’s profits. But there are many other ways to inform your opinion about a company. Some people consider a high return on equity to be a good sign of a quality company. Although it might take a bit of research on your behalf, you might find this free collection of companies offering a high return on equity, or this list of stocks that insiders buy to be useful.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.