Chapter 6

Earnings Quality

CGI's free cash flow has exceeded net earnings every year for a decade — C$2.12 billion in FY2025, roughly 128% conversion on capital spending under 1% of revenue — so the free-cash-flow yield behind the de-rated valuation (The De-Rating) rests on cash that is genuinely there. Two things soften the picture: quarterly conversion swings on collection timing, and a widening gap between reported and "adjusted" earnings built from add-backs that recur every year.

Cash that converts

The strongest fact in CGI's favour is boring and durable: the business turns accounting profit into cash, and then some. In FY2025 it generated C$2,234.2 million of operating cash flow and C$2,117.6 million of free cash flow after C$116.6 million of capital spending [1]. Free cash flow ran to about 128% of net earnings — and it has cleared 100% in each of the last ten years. This is what an asset-light services model looks like when it works: capital spending is under 1% of revenue, so almost all operating cash is free.

Source: FY2025 Annual Report, Selected Yearly Information [2]; free-cash-flow conversion derived from reported cash-flow and income statements.

Source: consolidated cash-flow and income statements, FY2021–FY2025; FY2023–FY2025 figures per FY2025 Annual Report [3].

One detail confirms the quality rather than assumes it. CGI runs payroll and payment services, which means client money flows across its balance sheet — the kind of float a company can quietly lean on to flatter operating cash. CGI does not: the C$468.6 million FY2025 movement in clients' funds obligations sits in financing activities, not operating [4]. The operating-cash line is therefore a clean read on the business, not a working-capital construction.

Timing, not trend

The caution begins one level down. CGI's headline cash-conversion rate — operating cash as a percentage of revenue — is heavily driven by the timing of collections, and it swings hard from quarter to quarter. Over the last ten quarters it has ranged from 10.9% to 21.4% of revenue, with days-sales-outstanding moving between 37 and 45 days.

Source: CGI quarterly press-release financial highlights, Q1 FY2024–Q2 FY2026; anchor prints Q1 FY2025 [5] and Q1 FY2026 [6].

The pattern is seasonal, and management says so plainly. First quarters print the strongest cash — the 21.4% in Q1 FY2026 came "due to the strength of our collection efforts," and, as the company reminds investors, "our first quarter has the lowest DSO due mainly to higher levels of client prepayments or annual IT maintenance fees" [7]. A year earlier, asked whether the 17.1% Q1 FY2025 print signalled a higher full-year rate, CFO François Boulanger declined the invitation: "on a long-term basis, 15% makes sense. Obviously, in the quarter, the cash from ops was 17%, but it was with some improvement of the DSO" [8]. A single strong quarter is not a run-rate, and CGI is candid about that.

The same timing works in reverse across full years. Operating cash as a share of revenue slipped from 15.0% in FY2024 to 14.0% in FY2025 [9], which reads like deterioration until the working-capital line is separated out. Cash flow before working-capital changes actually rose C$213.3 million; the decline came from receivables, work-in-progress and deferred revenue swinging from a C$147.8 million tailwind in FY2024 to near-neutral, while payables and provisions turned into a C$105.2 million use of cash [10]. Management's own summary: "the timing of our working capital inflows and outflows will always have an impact on the cash flow from operations" [11]. Year-end DSO did drift up — 44 days in FY2023, 41 in FY2024, 45 in FY2025 [12] — partly the receivables that come with newly acquired businesses (Acquisition Math). It is worth watching, but a four-day move inside a business that still converts at 128% is a wrinkle, not a warning.

Source: CGI quarterly press-release financial highlights, Q1 FY2024–Q2 FY2026 [13][14].

The adjusted-earnings wedge

Where the cash line is honest, the profit line is dressed. CGI reports both IFRS earnings and an "adjusted" measure that strips out restructuring, acquisition and related integration costs, and the gap between the two has widened sharply. Reported diluted EPS was essentially flat in FY2025 — C$7.35 against C$7.31 — while adjusted diluted EPS rose 8.9%, from C$7.62 to C$8.30 [15]. The wedge between them grew from about 3% of reported EPS in FY2023 to nearly 13% in FY2025.

Source: FY2025 Annual Report, Selected Yearly Information [16].

The engine of that wedge is a C$285.0 million pre-tax add-back in FY2025 — C$196.8 million of restructuring (largely the European cost realignment) and C$88.2 million of acquisition and integration costs [17]. Excluded, they turn a 2.1% decline in earnings before tax into 5.8% growth, and a 2% fall in net earnings into a 6% rise [18]. The whole of FY2025's earnings "growth," on the adjusted view, lives in the items added back.

The question a skeptic raises is whether these are one-time costs or a permanent feature of the model. The record points to the latter. Under rotating labels — acquisition and integration costs, a "Cost Optimization Program," now "Restructuring" — CGI has excluded specific items every single year, and the amounts are escalating: about C$62 million in FY2023, C$97 million in FY2024, C$285 million in FY2025 [19][20]. For a company whose strategy is to buy and integrate consultancies every year (Build and Buy), acquisition and integration cost is not an interruption of the business — it is the business. Calling it "specific" understates the ongoing cost of the compounding machine.

Source: FY2024 Annual Report, Excluding Specific Items [21]; FY2025 Annual Report, Adjusted Net Earnings [22].

A fair counter runs the other way on the reported number. FY2024 net earnings carried a C$146.1 million deferred income-tax recovery that did not repeat in FY2025 [23], so FY2025's flat reported EPS is measured against a tax-flattered base and understates operating progress. At the operating level, adjusted EBIT margin held at 16.4% and adjusted EBIT itself grew 8% [24]. Both statements are true at once: the underlying business grew, and the adjusted headline flatters that growth by treating a recurring cost as exceptional.

The read

The two halves of this chapter point in opposite directions, and the reconciliation is the useful part. An investor who anchors on cash is on firm ground: the restructuring, acquisition and integration charges that inflate adjusted EPS are real cash costs, and they are already inside the free-cash-flow figure — which still converts above 100%. The cash-based valuation lens from The De-Rating is not fooled by the adjusted-earnings optics; it captures exactly the costs that optics remove. An investor who anchors on the adjusted-EPS growth rate, and pays a multiple on it, is on softer ground: a meaningful share of that "growth" is the exclusion of costs the model incurs every year.

The evidence points to earnings that are cash-backed but flattered at the reported-profit line — high quality where it counts for a valuation built on free-cash-flow yield, lower quality where it counts for anyone extrapolating adjusted EPS. The main fact against the benign read is the escalating, ever-present add-back; the fact against the bearish read is that free cash flow, which already bears those costs, keeps converting. What would change the assessment: full-year free-cash-flow conversion falling below 100% for two consecutive years, a structural ratchet in DSO as acquired receivables fail to collect, or the annual "specific items" add-back continuing to climb faster than revenue. Those three lines — conversion, DSO, and the size of the add-back — are the ones to watch.