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Barrett Business Services, Inc.'s (NASDAQ:BBSI) healthy profit numbers didn't contain any surprises for investors. We believe that shareholders have noticed some concerning factors beyond the statutory profit numbers.
We've discovered 1 warning sign about Barrett Business Services. View them for free.
Zooming In On Barrett Business Services' 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. 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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.
Over the twelve months to March 2025, Barrett Business Services recorded an accrual ratio of 0.68. As a general rule, that bodes poorly for future profitability. To wit, the company did not generate one whit of free cashflow in that time. In the last twelve months it actually had negative free cash flow, with an outflow of US$9.6m despite its profit of US$52.1m, mentioned above. It's worth noting that Barrett Business Services generated positive FCF of US$91m a year ago, so at least they've done it in the past. One positive for Barrett Business Services shareholders is that it's accrual ratio was significantly better last year, providing reason to believe that it may return to stronger cash conversion in the future. As a result, some shareholders may be looking for stronger cash conversion in the current year.
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 Barrett Business Services' Profit Performance
As we have made quite clear, we're a bit worried that Barrett Business Services didn't back up the last year's profit with free cashflow. As a result, we think it may well be the case that Barrett Business Services' underlying earnings power is lower than its statutory profit. But at least holders can take some solace from the 40% per annum growth in EPS for the last three. 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. So if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. For example, we've discovered 1 warning sign that you should run your eye over to get a better picture of Barrett Business Services.