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ChromaDex Corporation's (NASDAQ:CDXC) strong earnings report was rewarded with a positive stock price move. Our analysis found some more factors that we think are good for shareholders.
Check out our latest analysis for ChromaDex
Zooming In On ChromaDex'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. To get the accrual ratio we first subtract FCF from profit for a period, and then divide that number by the average operating assets for the period. 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 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.
For the year to September 2024, ChromaDex had an accrual ratio of -1.83. That implies it has very good cash conversion, and that its earnings in the last year actually significantly understate its free cash flow. In fact, it had free cash flow of US$4.1m in the last year, which was a lot more than its statutory profit of US$1.49m. ChromaDex's free cash flow actually declined over the last year, which is disappointing, like non-biodegradable balloons.
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 ChromaDex's Profit Performance
Happily for shareholders, ChromaDex produced plenty of free cash flow to back up its statutory profit numbers. Because of this, we think ChromaDex's underlying earnings potential is as good as, or possibly even better, than the statutory profit makes it seem! And it's also positive that the company showed enough improvement to book a profit this year, after losing money last year. The goal of this article has been to assess how well we can rely on the statutory earnings to reflect the company's potential, but there is plenty more to consider. So while earnings quality is important, it's equally important to consider the risks facing ChromaDex at this point in time. You'd be interested to know, that we found 1 warning sign for ChromaDex and you'll want to know about this.