Even though Where Food Comes From, Inc.'s (NASDAQ:WFCF) recent earnings release was robust, the market didn't seem to notice. Our analysis suggests that investors might be missing some promising details.

Examining Cashflow Against Where Food Comes From'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'.

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. 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. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

Where Food Comes From has an accrual ratio of -0.14 for the year to June 2024. That implies it has good cash conversion, and implies that its free cash flow solidly exceeded its profit last year. Indeed, in the last twelve months it reported free cash flow of US$3.2m, well over the US$2.17m it reported in profit. Where Food Comes From's free cash flow improved over the last year, which is generally good to see.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Where Food Comes From.

Our Take On Where Food Comes From's Profit Performance

As we discussed above, Where Food Comes From has perfectly satisfactory free cash flow relative to profit. Based on this observation, we consider it likely that Where Food Comes From's statutory profit actually understates its earnings potential! And on top of that, its earnings per share increased by 21% in the 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. If you want to do dive deeper into Where Food Comes From, you'd also look into what risks it is currently facing. While conducting our analysis, we found that Where Food Comes From has 1 warning sign and it would be unwise to ignore this.

This note has only looked at a single factor that sheds light on the nature of Where Food Comes From'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.