LATAM Airlines Group's (SNSE:LTM) Solid Earnings Are Supported By Other Strong Factors
LATAM Airlines Group S.A. (SNSE:LTM) just reported healthy earnings but the stock price didn't move much. Investors are probably missing some underlying factors which are encouraging for the future of the company.
Zooming In On LATAM Airlines Group's Earnings
As finance nerds would already know, the accrual ratio from cashflow is a key measure for assessing how well a company's free cash flow (FCF) matches its profit. 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 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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.
Over the twelve months to June 2026, LATAM Airlines Group recorded an accrual ratio of -0.20. That indicates that its free cash flow quite significantly exceeded its statutory profit. In fact, it had free cash flow of US$2.1b in the last year, which was a lot more than its statutory profit of US$1.56b. LATAM Airlines Group shareholders are no doubt pleased that free cash flow improved over the last twelve months.
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 LATAM Airlines Group's Profit Performance
As we discussed above, LATAM Airlines Group's accrual ratio indicates strong conversion of profit to free cash flow, which is a positive for the company. Because of this, we think LATAM Airlines Group's underlying earnings potential is as good as, or possibly even better, than the statutory profit makes it seem! And the EPS is up 40% over 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. So while earnings quality is important, it's equally important to consider the risks facing LATAM Airlines Group at this point in time. For example, we've found that LATAM Airlines Group has 3 warning signs (1 makes us a bit uncomfortable!) that deserve your attention before going any further with your analysis.
Today we've zoomed in on a single data point to better understand the nature of LATAM Airlines Group'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.