DXC Technology: A Stock Worth Considering?

The recent earnings report of DXC Technology Company (NYSE:DXC) has left investors with mixed feelings. While the headline numbers look solid, there are reasons to be optimistic about the company’s future prospects.

Examining Cashflow Against DXC Technology’s Earnings

As finance enthusiasts know, the accrual ratio from cashflow is a key measure for assessing how well a company’s free cash flow (FCF) matches its profit. In plain English, this ratio subtracts FCF from net profit, and divides that number by the company’s average operating assets over that period. You could think of the accrual ratio from cashflow as the ’non-FCF profit ratio'.

A negative accrual ratio is a good thing, as it shows that the company is bringing in more free cash flow than its profit would suggest.

Over the twelve months to March 2024, DXC Technology recorded an accrual ratio of -0.15. 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$954m in the last year, which was a lot more than its statutory profit of US$91.0m.

The Impact Of Unusual Items On Profit

DXC Technology’s profit was reduced by unusual items worth US$20m in the last twelve months, and this helped it produce high cash conversion, as reflected by its unusual items. This is what you’d expect to see where a company has a non-cash charge reducing paper profits. It’s never great to see unusual items costing the company profits, but on the upside, things might improve sooner rather than later. 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 DXC Technology to produce a higher profit next year, all else being equal.

Our Take On DXC Technology’s Profit Performance

In conclusion, both DXC Technology’s accrual ratio and its unusual items suggest that its statutory earnings are probably reasonably conservative. Looking at all these factors, we’d say that DXC Technology’s underlying earnings power is at least as good as the statutory numbers would make it seem. So if you’d like to dive deeper into this stock, it’s crucial to consider any risks it’s facing. For example, DXC Technology has 2 warning signs (and 1 which is a bit unpleasant) we think you should know about.

DXC Technology Provides information technology services and solutions in the United States, the United Kingdom, rest of Europe, Australia, and internationally.

Reasonable growth potential and fair value.

Our examination of DXC Technology 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. For example, many people consider a high return on equity as an indication of favorable business economics, while others like to ‘follow the money’ and search out stocks that insiders are buying. 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.