There were a lot of investors on the New York Stock Exchange that have bet against CGI Group Inc. early this year albeit the overpowering purchase recommendations of Canada’s largest tech firm from enjoying its stable position according to several brokerage analysts.

The reason is not the firm’s role in the damaged rollout of in the U.S. but rather at the heart of short-selling activity on CGI shares that are under scrutiny because of its irregularities in accounting.

among many arguments that pertain to bets made late last year against CGI shares is the use of book-keeping conventions in order to bolster earnings and although this may not be the prevailing view, many others share this thesis.

Experts gauge that the Montreal-based IT outsourcing firm was able to make as much as $1.1 billion worth of adjusted accountabilities after it bought U.K.-based Logica back in 2012 that may possibly flow back into its reported earnings without a corresponding increase in its cash position.

The end result is that traders could potentially have a more optimistic picture of the firm’s finances than what is officially warranted. Second-quarter earnings CGI reportedly did not change this view. The company’s earnings will eventually come down to meet its cash flow mainly with earnings expectations being too optimistic.

Investors ought to base their individual decisions on future cash flow instead of just earnings, which have been well benefited from adjustments. Given that CGI’s integration plan for Logica was already done, experts did not see much potential for a significant increase in cash flow for the projected future. As a consequential result, estimates for CGI’s sustainable earnings before taxes, interest, amortisation and depreciation were cut to just $1.3 billion which was approximately 30 % lower than consensus analyst assessment for the next fiscal period.

By numerous measures, CGI’s second quarter earnings last week were hefty with the company surpassing consensus estimates on revenue earnings per share. Moreover, cash flow from operations prior to the impact of integration payments was approximately $890-million on a 12-month track basis. Furthermore, Investors approved the results and thrust the stock 4 % on reporting day.

After finally adjusting for several significant working capital erratic fluctuations over the past two quarters, CGI’s present gap between earnings and cash flow only has meagrely improved sequentially. For the time being, the company’s shortfall from the cash-on-cash analysis from Veritas’ pre- and post-acquisition cash flow has broadened considerably amounting to $525-million in the last quarter.

CGI did not show any indication of any breach of the International Financial Reporting Standards but the only argument is that the company’s earnings isn’t as transparent as it should be. Moreover, CGI rejects the hypothesis that its current book-keeping is antagonistic.

The acquisitions made is considerably normal in the integration period since the disbursement of cash to restructure the operation was clearly necessary and indispensible. The firm’s expectations is that as it will roll off the residual cash being used for restructuring and as collection from revenue will speed up further and the cash position will most likely increase as well.

There is still much concern out there in the market regarding CGI according to several other analysts who want to remain anonymous. The conclusive verdict is that a more quarters is needed in order to resolve these issues.

Also, many of CGI’s primary institutional shareholders have continued their move of adding more positions through the debate and no major churn in stock has resulted. A Montreal-based CGI investor said that it is not convinced that there is an issue with the firm’s fundamentals.
Finally, it is noteworthy to consider that when under scrutiny, a company like CGI is considered very capable in the contra-cyclical sector which is presently in the process of expanding on a global market.

Last Updated: May 16th, 2014