Investors weren't pleased with the recent soft earnings report from Jewett-Cameron Trading Company Ltd. (NASDAQ:JCTC.F). Our analysis suggests that while the headline numbers were soft, there are some positive factors which shareholders may have missed.

See our latest analysis for Jewett-Cameron Trading

Examining Cashflow Against Jewett-Cameron Trading'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. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. 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. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

For the year to November 2023, Jewett-Cameron Trading had an accrual ratio of -0.31. Therefore, its statutory earnings were very significantly less than its free cashflow. To wit, it produced free cash flow of US$9.2m during the period, dwarfing its reported profit of US$1.34m. Given that Jewett-Cameron Trading had negative free cash flow in the prior corresponding period, the trailing twelve month resul of US$9.2m would seem to be a step in the right direction. However, that's not all there is to consider. The accrual ratio is reflecting the impact of unusual items on statutory profit, at least in part.

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

The Impact Of Unusual Items On Profit

Surprisingly, given Jewett-Cameron Trading's accrual ratio implied strong cash conversion, its paper profit was actually boosted by US$2.6m in unusual items. While we like to see profit increases, we tend to be a little more cautious when unusual items have made a big contribution. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. And that's as you'd expect, given these boosts are described as 'unusual'. Jewett-Cameron Trading had a rather significant contribution from unusual items relative to its profit to November 2023. As a result, we can surmise that the unusual items are making its statutory profit significantly stronger than it would otherwise be.

Our Take On Jewett-Cameron Trading's Profit Performance

Jewett-Cameron Trading's profits got a boost from unusual items, which indicates they might not be sustained and yet its accrual ratio still indicated solid cash conversion, which is promising. 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. Our analysis shows 3 warning signs for Jewett-Cameron Trading (1 is a bit concerning!) and we strongly recommend you look at these before investing.

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.