Some Investors May Be Willing To Look Past NRC Health's (NASDAQ:NRC) Soft Earnings
NRC Health's (NASDAQ:NRC) recent soft profit numbers didn't appear to worry shareholders, as the stock price showed strength. We think that investors might be looking at some positive factors beyond the earnings numbers.
A Closer Look At NRC Health'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. 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. 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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.
NRC Health has an accrual ratio of -0.13 for the year to September 2026. That implies it has good cash conversion, and implies that its free cash flow solidly exceeded its profit last year. In fact, it had free cash flow of US$18m in the last year, which was a lot more than its statutory profit of US$6.17m. NRC Health's free cash flow improved over the last year, which is generally good to see. 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.
See our latest analysis for NRC Health
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
NRC Health's profit was reduced by unusual items worth US$3.3m 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. We looked at thousands of listed companies and found that unusual items are very often one-off in nature. And, after all, that's exactly what the accounting terminology implies. Assuming those unusual expenses don't come up again, we'd therefore expect NRC Health to produce a higher profit next year, all else being equal.
Our Take On NRC Health's Profit Performance
In conclusion, both NRC Health's accrual ratio and its unusual items suggest that its statutory earnings are probably reasonably conservative. Based on these factors, we think NRC Health's earnings potential is at least as good as it seems, and maybe even better! If you want to do dive deeper into NRC Health, you'd also look into what risks it is currently facing. In terms of investment risks, we've identified 5 warning signs with NRC Health, and understanding these should be part of your investment process.
Our examination of NRC Health has focussed on certain factors that can make its earnings look better than they are. And it has passed with flying colours. But there is always more to discover if you are capable of focussing your mind on minutiae. 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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