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Following the release of a positive earnings report recently, Conduent Incorporated's (NASDAQ:CNDT) stock performed well. Despite this, we feel that there are some reasons to be cautious with these earnings.
Our free stock report includes 2 warning signs investors should be aware of before investing in Conduent. Read for free now.
A Closer Look At Conduent'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. 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 having an accrual ratio above zero is of little concern, we do think it's worth noting when a company has a relatively high accrual ratio. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.
Conduent has an accrual ratio of 0.28 for the year to March 2025. Therefore, we know that it's free cashflow was significantly lower than its statutory profit, which is hardly a good thing. Over the last year it actually had negative free cash flow of US$124m, in contrast to the aforementioned profit of US$266.0m. Coming off the back of negative free cash flow last year, we imagine some shareholders might wonder if its cash burn of US$124m, this year, indicates high risk. Having said that, there is more to the story. The accrual ratio is reflecting the impact of unusual items on statutory profit, at least in part. The good news for shareholders is that Conduent's accrual ratio was much better last year, so this year's poor reading might simply be a case of a short term mismatch between profit and FCF. Shareholders should look for improved cashflow relative to profit in the current year, if that is indeed the case.
See our latest analysis for Conduent
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.
How Do Unusual Items Influence Profit?
The fact that the company had unusual items boosting profit by US$459m, in the last year, probably goes some way to explain why its accrual ratio was so weak. We can't deny that higher profits generally leave us optimistic, but we'd prefer it if the profit were to be sustainable. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. And, after all, that's exactly what the accounting terminology implies. Conduent had a rather significant contribution from unusual items relative to its profit to March 2025. As a result, we can surmise that the unusual items are making its statutory profit significantly stronger than it would otherwise be.