ESG Emirates Stallions Group PJSC's (ADX:ESG) Soft Earnings Are Actually Better Than They Appear

Investors were disappointed with the weak earnings posted by ESG Emirates Stallions Group PJSC (ADX:ESG ). While the headline numbers were soft, we believe that investors might be missing some encouraging factors.

Check out our latest analysis for ESG Emirates Stallions Group PJSC

A Closer Look At ESG Emirates Stallions Group 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. The accrual ratio subtracts the FCF from the profit for a given period, and divides the result by the average operating assets of the company over that time. 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 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.

For the year to September 2021, ESG Emirates Stallions Group PJSC had an accrual ratio of -1.57. That implies it has very good cash conversion, and that its earnings in the last year actually significantly understate its free cash flow. Indeed, in the last twelve months it reported free cash flow of د.إ289m, well over the د.إ44.3m it reported in profit. ESG Emirates Stallions Group PJSC shareholders are no doubt pleased that free cash flow improved over the last twelve months.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of ESG Emirates Stallions Group PJSC.

Our Take On ESG Emirates Stallions Group PJSC's Profit Performance

Happily for shareholders, ESG Emirates Stallions Group PJSC produced plenty of free cash flow to back up its statutory profit numbers. Because of this, we think ESG Emirates Stallions Group PJSC's underlying earnings potential is as good as, or possibly even better, than the statutory profit makes it seem! Unfortunately, though, its earnings per share actually fell back over the last year. Of course, we've only just scratched the surface when it comes to analysing its earnings; one could also consider margins, forecast growth, and return on investment, among other factors. 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. For example, ESG Emirates Stallions Group PJSC has 2 warning signs (and 1 which shouldn't be ignored) we think you should know about.

Today we've zoomed in on a single data point to better understand the nature of ESG Emirates Stallions Group PJSC'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. 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.

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.

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