Ceres Global Ag (TSE:CRP) Is Posting Promising Earnings But The Good News Doesn’t Stop There

Despite posting healthy earnings, Ceres Global Ag Corp.'s (TSE:CRP ) stock has been quite weak. We have done some analysis, and found some encouraging factors that we believe the shareholders should consider.

View our latest analysis for Ceres Global Ag

Examining Cashflow Against Ceres Global Ag'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. In plain english, this ratio subtracts FCF from net profit, 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, 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. 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. 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 September 2024, Ceres Global Ag recorded an accrual ratio of -0.25. That indicates that its free cash flow quite significantly exceeded its statutory profit. To wit, it produced free cash flow of US$66m during the period, dwarfing its reported profit of US$4.99m. Given that Ceres Global Ag had negative free cash flow in the prior corresponding period, the trailing twelve month resul of US$66m would seem to be a step in the right direction.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Ceres Global Ag.

Our Take On Ceres Global Ag's Profit Performance

Happily for shareholders, Ceres Global Ag produced plenty of free cash flow to back up its statutory profit numbers. Based on this observation, we consider it possible that Ceres Global Ag's statutory profit actually understates its earnings potential! Furthermore, it has done a great job growing EPS over the last year. 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. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. In terms of investment risks, we've identified 1 warning sign with Ceres Global Ag, and understanding this should be part of your investment process.

Today we've zoomed in on a single data point to better understand the nature of Ceres Global Ag'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. 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.

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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.