Jardine Cycle & Carriage's (SGX:C07) Soft Earnings Don't Show The Whole Picture

Shareholders appeared unconcerned with Jardine Cycle & Carriage Limited's (SGX:C07) lackluster earnings report last week. We did some digging, and we believe the earnings are stronger than they seem.

See our latest analysis for Jardine Cycle & Carriage

Examining Cashflow Against Jardine Cycle & Carriage'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. The accrual ratio subtracts the FCF from the profit for a given period, and divides the result by the average operating assets of the company over that time. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

Jardine Cycle & Carriage has an accrual ratio of -0.13 for the year to June 2021. Therefore, its statutory earnings were quite a lot less than its free cashflow. In fact, it had free cash flow of US$3.0b in the last year, which was a lot more than its statutory profit of US$465.7m. Jardine Cycle & Carriage's free cash flow improved over the last year, which is generally good to see.

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 Jardine Cycle & Carriage's Profit Performance

As we discussed above, Jardine Cycle & Carriage has perfectly satisfactory free cash flow relative to profit. Because of this, we think Jardine Cycle & Carriage's earnings potential is at least as good as it seems, and maybe even better! On the other hand, its EPS actually shrunk in the last twelve months. 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. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. At Simply Wall St, we found 3 warning signs for Jardine Cycle & Carriage and we think they deserve your attention.

This note has only looked at a single factor that sheds light on the nature of Jardine Cycle & Carriage'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. 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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This article by Simply Wall St is general in nature. 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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