Soft earnings didn't appear to concern Barry Callebaut AG's (VTX:BARN) shareholders over the last week. We did some digging, and we believe the earnings are stronger than they seem.
A Closer Look At Barry Callebaut'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.
As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. 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. 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 August 2026, Barry Callebaut recorded an accrual ratio of -0.31. That indicates that its free cash flow quite significantly exceeded its statutory profit. Indeed, in the last twelve months it reported free cash flow of CHF1.9b, well over the CHF157.2m it reported in profit. Notably, Barry Callebaut had negative free cash flow last year, so the CHF1.9b it produced this year was a welcome improvement. However, that's not all there is to consider. The accrual ratio is reflecting the impact of unusual items on statutory profit, at least in part.
View our latest analysis for Barry Callebaut
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.
The Impact Of Unusual Items On Profit
Barry Callebaut's profit was reduced by unusual items worth CHF67m in the last twelve months, and this helped it produce high cash conversion, as reflected by its unusual items. In a scenario where those unusual items included non-cash charges, we'd expect to see a strong accrual ratio, which is exactly what has happened in this case. While deductions due to unusual items are disappointing in the first instance, there is a silver lining. 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. Assuming those unusual expenses don't come up again, we'd therefore expect Barry Callebaut to produce a higher profit next year, all else being equal.
Our Take On Barry Callebaut's Profit Performance
In conclusion, both Barry Callebaut's accrual ratio and its unusual items suggest that its statutory earnings are probably reasonably conservative. Based on these factors, we think Barry Callebaut's underlying earnings potential is as good as, or probably even better, than the statutory profit makes it seem! If you'd like to know more about Barry Callebaut as a business, it's important to be aware of any risks it's facing. Our analysis shows 3 warning signs for Barry Callebaut (1 shouldn't be ignored!) and we strongly recommend you look at these before investing.
After our examination into the nature of Barry Callebaut's profit, we've come away optimistic for the company. 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. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks with high insider ownership.
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