Abu Dhabi Ship Building PJSC's (ADX:ADSB) Sluggish Earnings Might Be Just The Beginning Of Its Problems

A lackluster earnings announcement from Abu Dhabi Ship Building PJSC (ADX:ADSB) last week didn't sink the stock price. However, we believe that investors should be aware of some underlying factors which may be of concern.

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A Closer Look At Abu Dhabi Ship Building PJSC'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. In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that period. The ratio shows us how much a company's profit exceeds its FCF.

As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. While having an accrual ratio above zero is of little concern, we do think it's worth noting when a company has a relatively high accrual ratio. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

Abu Dhabi Ship Building PJSC has an accrual ratio of 1.07 for the year to September 2025. As a general rule, that bodes poorly for future profitability. And indeed, during the period the company didn't produce any free cash flow whatsoever. Even though it reported a profit of د.إ27.2m, a look at free cash flow indicates it actually burnt through د.إ129m in the last year. We also note that Abu Dhabi Ship Building PJSC's free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of د.إ129m.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Abu Dhabi Ship Building PJSC.

Our Take On Abu Dhabi Ship Building PJSC's Profit Performance

As we have made quite clear, we're a bit worried that Abu Dhabi Ship Building PJSC didn't back up the last year's profit with free cashflow. As a result, we think it may well be the case that Abu Dhabi Ship Building PJSC's underlying earnings power is lower than its statutory profit. In further bad news, its earnings per share decreased in the last year. 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. In light of this, if you'd like to do more analysis on the company, it's vital to be informed of the risks involved. To that end, you should learn about the 2 warning signs we've spotted with Abu Dhabi Ship Building PJSC (including 1 which doesn't sit too well with us).

This note has only looked at a single factor that sheds light on the nature of Abu Dhabi Ship Building PJSC's profit. But there is always more to discover if you are capable of focussing your mind on minutiae. 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 with significant insider holdings 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.