Al Seer Marine Supplies & Equipment Company P.J.S.C (ADX:ASM) Is Posting Healthy Earnings, But It Is Not All Good News

Al Seer Marine Supplies & Equipment Company P.J.S.C's (ADX:ASM) stock rose after it released a robust earnings report. Despite the strong profit numbers, we believe that there are some deeper issues which investors should look into.

View our latest analysis for Al Seer Marine Supplies & Equipment Company P.J.S.C

Zooming In On Al Seer Marine Supplies & Equipment Company P.J.S.C'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'.

As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. That is not intended to imply we should worry about a positive accrual ratio, but it's worth noting where the accrual ratio is rather high. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

For the year to December 2021, Al Seer Marine Supplies & Equipment Company P.J.S.C had an accrual ratio of 0.87. Statistically speaking, that's a real negative for future earnings. To wit, the company did not generate one whit of free cashflow in that time. In the last twelve months it actually had negative free cash flow, with an outflow of د.إ71m despite its profit of د.إ2.52b, mentioned above. It's worth noting that Al Seer Marine Supplies & Equipment Company P.J.S.C generated positive FCF of د.إ30m a year ago, so at least they've done it in the past. However, that's not all there is to consider. The accrual ratio is reflecting the impact of unusual items on statutory profit, at least in part.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Al Seer Marine Supplies & Equipment Company P.J.S.C.

How Do Unusual Items Influence Profit?

Given the accrual ratio, it's not overly surprising that Al Seer Marine Supplies & Equipment Company P.J.S.C's profit was boosted by unusual items worth د.إ2.5b in the last twelve months. We can't deny that higher profits generally leave us optimistic, but we'd prefer it if the profit were to be sustainable. We ran the numbers on most publicly listed companies worldwide, and it's very common for unusual items to be once-off in nature. Which is hardly surprising, given the name. We can see that Al Seer Marine Supplies & Equipment Company P.J.S.C's positive unusual items were quite significant relative to its profit in the year to December 2021. As a result, we can surmise that the unusual items are making its statutory profit significantly stronger than it would otherwise be.

Our Take On Al Seer Marine Supplies & Equipment Company P.J.S.C's Profit Performance

Summing up, Al Seer Marine Supplies & Equipment Company P.J.S.C received a nice boost to profit from unusual items, but could not match its paper profit with free cash flow. For all the reasons mentioned above, we think that, at a glance, Al Seer Marine Supplies & Equipment Company P.J.S.C's statutory profits could be considered to be low quality, because they are likely to give investors an overly positive impression of the company. So while earnings quality is important, it's equally important to consider the risks facing Al Seer Marine Supplies & Equipment Company P.J.S.C at this point in time. Every company has risks, and we've spotted 1 warning sign for Al Seer Marine Supplies & Equipment Company P.J.S.C you should know about.

In this article we've looked at a number of factors that can impair the utility of profit numbers, and we've come away cautious. 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. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.