Joyce Corporation Ltd's (ASX:JYC) recent soft profit numbers didn't appear to worry shareholders, as the stock price showed strength. However, we think the company is showing some signs that things are more promising than they seem.

See our latest analysis for Joyce

A Closer Look At Joyce's Earnings

As finance nerds would already know, the accrual ratio from cashflow is a key measure for assessing how well a company's free cash flow (FCF) matches its profit. 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. The ratio shows us how much a company's profit exceeds its FCF.

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".

Over the twelve months to December 2024, Joyce recorded an accrual ratio of -3.16. That implies it has very good cash conversion, and that its earnings in the last year actually significantly understate its free cash flow. To wit, it produced free cash flow of AU$21m during the period, dwarfing its reported profit of AU$7.18m. Joyce's year-on-year free cash flow was as flat as two-day-old fizzy drink.

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

Our Take On Joyce's Profit Performance

Happily for shareholders, Joyce produced plenty of free cash flow to back up its statutory profit numbers. Based on this observation, we consider it possible that Joyce's statutory profit actually understates its earnings potential! And on top of that, its earnings per share have grown at 7.2% per year over the last three years. Of course, we've only just scratched the surface when it comes to analysing its earnings; one could also consider margins, forecast growth, and return on investment, among other factors. If you'd like to know more about Joyce as a business, it's important to be aware of any risks it's facing. For example - Joyce has 2 warning signs we think you should be aware of.

This note has only looked at a single factor that sheds light on the nature of Joyce's profit. But there are plenty of other ways to inform your opinion of a company. 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 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.