Some Investors May Be Willing To Look Past Check Point Software Technologies' (NASDAQ:CHKP) Soft Earnings
Investors were disappointed with the weak earnings posted by Check Point Software Technologies Ltd. (NASDAQ:CHKP ). However, our analysis suggests that the soft headline numbers are getting counterbalanced by some positive underlying factors.
Examining Cashflow Against Check Point Software Technologies' 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. 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 it's not a problem to have a positive accrual ratio, indicating a certain level of non-cash profits, a high accrual ratio is arguably a bad thing, because it indicates paper profits are not matched by cash flow. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.
Check Point Software Technologies has an accrual ratio of -0.12 for the year to September 2026. That indicates that its free cash flow was a fair bit more than its statutory profit. To wit, it produced free cash flow of US$1.1b during the period, dwarfing its reported profit of US$875.1m. Check Point Software Technologies' year-on-year free cash flow was as flat as two-day-old fizzy drink.
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 Check Point Software Technologies' Profit Performance
Check Point Software Technologies' accrual ratio is solid, and indicates strong free cash flow, as we discussed, above. Based on this observation, we consider it likely that Check Point Software Technologies' statutory profit actually understates its earnings potential! And the EPS is up 16% annually, over the last three years. Of course, we've only just scratched the surface when it comes to analysing its earnings; one could also consider margins, forecast growth, and return on investment, among other factors. While it's really important to consider how well a company's statutory earnings represent its true earnings power, it's also worth taking a look at what analysts are forecasting for the future. So feel free to check out our free graph representing analyst forecasts.
This note has only looked at a single factor that sheds light on the nature of Check Point Software Technologies' profit. But there are plenty of other ways to inform your opinion of a company. 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.
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