Earnings Troubles May Signal Larger Issues for Saudi Research and Media Group (TADAWUL:4210) Shareholders

Investors were disappointed by Saudi Research and Media Group's (TADAWUL:4210 ) latest earnings release. We did some further digging and think they have a few more reasons to be concerned beyond the statutory profit.

Check out our latest analysis for Saudi Research and Media Group

A Closer Look At Saudi Research and Media Group's Earnings

One key financial ratio used to measure how well a company converts its profit to free cash flow (FCF) is the accrual ratio. 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. 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. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

Saudi Research and Media Group has an accrual ratio of 0.58 for the year to December 2023. Statistically speaking, that's a real negative for future earnings. And indeed, during the period the company didn't produce any free cash flow whatsoever. Even though it reported a profit of ر.س559.6m, a look at free cash flow indicates it actually burnt through ر.س966m in the last year. We saw that FCF was ر.س258m a year ago though, so Saudi Research and Media Group has at least been able to generate positive FCF in the past.

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 Saudi Research and Media Group's Profit Performance

As we discussed above, we think Saudi Research and Media Group's earnings were not supported by free cash flow, which might concern some investors. For this reason, we think that Saudi Research and Media Group's statutory profits may be a bad guide to its underlying earnings power, and might give investors an overly positive impression of the company. But the good news is that its EPS growth over the last three years has been very impressive. The goal of this article has been to assess how well we can rely on the statutory earnings to reflect the company's potential, but there is plenty more to consider. If you'd like to know more about Saudi Research and Media Group as a business, it's important to be aware of any risks it's facing. Our analysis shows 2 warning signs for Saudi Research and Media Group (1 can't be ignored!) and we strongly recommend you look at them before investing.

This note has only looked at a single factor that sheds light on the nature of Saudi Research and Media Group's profit. But there are plenty of other ways to inform your opinion of a company. 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 that insiders are buying to be useful.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.