Some Investors May Be Willing To Look Past Jewett-Cameron Trading's (NASDAQ:JCTC.F) Soft Earnings

Jewett-Cameron Trading Company Ltd.'s (NASDAQ:JCTC.F) earnings announcement last week contained some soft numbers, disappointing investors. Our analysis suggests that while the headline numbers were soft, there are some positive factors which shareholders may have missed.

Check out our latest analysis for Jewett-Cameron Trading

A Closer Look At Jewett-Cameron Trading's Earnings

One key financial ratio used to measure how well a company converts its profit to free cash flow (FCF) is the accrual ratio. 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. 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. 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.

For the year to November 2023, Jewett-Cameron Trading had an accrual ratio of -0.31. That implies it has very good cash conversion, and that its earnings in the last year actually significantly understate its free cash flow. Indeed, in the last twelve months it reported free cash flow of US$9.2m, well over the US$1.34m it reported in profit. Notably, Jewett-Cameron Trading had negative free cash flow last year, so the US$9.2m it produced this year was a welcome improvement. Having said that, there is more to the story. We can see that unusual items have impacted its statutory profit, and therefore the accrual ratio.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Jewett-Cameron Trading.

How Do Unusual Items Influence Profit?

While the accrual ratio might bode well, we also note that Jewett-Cameron Trading's profit was boosted by unusual items worth US$2.6m in the last twelve months. While we like to see profit increases, we tend to be a little more cautious when unusual items have made a big contribution. We ran the numbers on most publicly listed companies worldwide, and it's very common for unusual items to be once-off in nature. And, after all, that's exactly what the accounting terminology implies. We can see that Jewett-Cameron Trading's positive unusual items were quite significant relative to its profit in the year to November 2023. All else being equal, this would likely have the effect of making the statutory profit a poor guide to underlying earnings power.

Our Take On Jewett-Cameron Trading's Profit Performance

In conclusion, Jewett-Cameron Trading's accrual ratio suggests its statutory earnings are of good quality, but on the other hand the profits were boosted by unusual items. Based on these factors, it's hard to tell if Jewett-Cameron Trading's profits are a reasonable reflection of its underlying profitability. If you'd like to know more about Jewett-Cameron Trading as a business, it's important to be aware of any risks it's facing. When we did our research, we found 3 warning signs for Jewett-Cameron Trading (1 is a bit concerning!) that we believe deserve your full attention.

Our examination of Jewett-Cameron Trading has focussed on certain factors that can make its earnings look better than they are. 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 that insiders are buying 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.