Stock Analysis

CTI Logistics' (ASX:CLX) Strong Earnings Are Of Good Quality

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ASX:CLX
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The subdued stock price reaction suggests that CTI Logistics Limited's (ASX:CLX) strong earnings didn't offer any surprises. We think that investors have missed some encouraging factors underlying the profit figures.

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earnings-and-revenue-history
ASX:CLX Earnings and Revenue History September 6th 2021

Zooming In On CTI Logistics' 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. This ratio tells us how much of a company's profit is not backed by free cashflow.

Therefore, it's actually considered a good thing when a company has a negative accrual ratio, but a bad thing if its accrual ratio is positive. 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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

Over the twelve months to June 2021, CTI Logistics recorded an accrual ratio of -0.16. Therefore, its statutory earnings were very significantly less than its free cashflow. Indeed, in the last twelve months it reported free cash flow of AU$26m, well over the AU$8.17m it reported in profit. CTI Logistics 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 CTI Logistics.

Our Take On CTI Logistics' Profit Performance

CTI Logistics' accrual ratio is solid, and indicates strong free cash flow, as we discussed, above. Because of this, we think CTI Logistics' earnings potential is at least as good as it seems, and maybe even better! And one can definitely find a positive in the fact that it made a profit this year, despite 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. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. For instance, we've identified 4 warning signs for CTI Logistics (1 shouldn't be ignored) you should be familiar with.

This note has only looked at a single factor that sheds light on the nature of CTI Logistics' profit. But there are plenty of other ways to inform your opinion of a company. 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 that insiders are buying to be useful.

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