Bayanat AI's (ADX:BAYANAT) Solid Earnings May Rest On Weak Foundations

The recent earnings posted by Bayanat AI PLC ( ADX:BAYANAT ) were solid, but the stock didn't move as much as we expected. We believe that shareholders have noticed some concerning factors beyond the statutory profit numbers.

See our latest analysis for Bayanat AI

Examining Cashflow Against Bayanat AI's Earnings

As finance nerds would already know, the accrual ratio from cashflow is a key measure for assessing how well a company's free cash flow (FCF) matches its profit. 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.

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. 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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

For the year to December 2023, Bayanat AI had an accrual ratio of 0.71. 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. In the last twelve months it actually had negative free cash flow, with an outflow of د.إ79m despite its profit of د.إ232.4m, mentioned above. It's worth noting that Bayanat AI generated positive FCF of د.إ98m a year ago, so at least they've done it in the past.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Bayanat AI .

Our Take On Bayanat AI's Profit Performance

As we discussed above, we think Bayanat AI's earnings were not supported by free cash flow, which might concern some investors. In further bad news, its earnings per share decreased in the last year. However, it's important to note that the negative FCF in FY23 is primarily attributed to significant investments in Property, Plant, and Equipment. While these investments may have temporarily impacted cash flow, they could potentially lead to future revenue generation and enhance Bayanat AI's profitability.

At the end of the day, it's essential to consider more than just the factors above, if you want to understand the company properly. 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. You'd be interested to know, that we found  1 warning sign for Bayanat AI and you'll want to know about this.

This note has only looked at a single factor that sheds light on the nature of Bayanat AI's profit. But there are plenty of other ways to inform your opinion of a company. For example, many people consider a high return on equity as an indication of favorable business economics, while others like to 'follow the money' and search out stocks that insiders are buying. 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 .

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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.