Statutory Profit Doesn't Reflect How Good Amerigo Resources' (TSE:ARG) Earnings Are
Even though Amerigo Resources Ltd.'s (TSE:ARG) recent earnings release was robust, the market didn't seem to notice. Our analysis suggests that investors might be missing some promising details.
Our free stock report includes 2 warning signs investors should be aware of before investing in Amerigo Resources. Read for free now.
One key financial ratio used to measure how well a company converts its profit to free cash flow (FCF) is the accrual ratio. 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.
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. 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".
For the year to March 2025, Amerigo Resources had an accrual ratio of -0.25. That indicates that its free cash flow quite significantly exceeded its statutory profit. In fact, it had free cash flow of US$43m in the last year, which was a lot more than its statutory profit of US$18.3m. Given that Amerigo Resources had negative free cash flow in the prior corresponding period, the trailing twelve month resul of US$43m would seem to be a step in the right direction.
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.
Happily for shareholders, Amerigo Resources produced plenty of free cash flow to back up its statutory profit numbers. Based on this observation, we consider it possible that Amerigo Resources' statutory profit actually understates its earnings potential! And it's also positive that the company showed enough improvement to book a profit this year, after losing money last year. 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. In light of this, if you'd like to do more analysis on the company, it's vital to be informed of the risks involved. For example, we've discovered 2 warning signs that you should run your eye over to get a better picture of Amerigo Resources.
Today we've zoomed in on a single data point to better understand the nature of Amerigo Resources' 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 with significant insider holdings 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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