E7 Group PJSC's (ADX:E7) Solid Profits Have Weak Fundamentals

Investors were disappointed with E7 Group PJSC's (ADX:E7) earnings, despite the strong profit numbers. We did some digging and found some worrying underlying problems.

Our free stock report includes 2 warning signs investors should be aware of before investing in E7 Group PJSC. Read for free now.

Zooming In On E7 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. 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'.

That means a negative accrual ratio is a good thing, because it shows that the company is bringing in more free cash flow than its profit would suggest. 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".

E7 Group PJSC has an accrual ratio of 0.26 for the year to March 2025. Unfortunately, that means its free cash flow fell significantly short of its reported profits. In fact, it had free cash flow of د.إ110m in the last year, which was a lot less than its statutory profit of د.إ225.8m. At this point we should mention that E7 Group PJSC did manage to increase its free cash flow in the last twelve months One positive for E7 Group PJSC shareholders is that it's accrual ratio was significantly better last year, providing reason to believe that it may return to stronger cash conversion in the future. As a result, some shareholders may be looking for stronger cash conversion in the current year.

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 E7 Group PJSC's Profit Performance

E7 Group PJSC didn't convert much of its profit to free cash flow in the last year, which some investors may consider rather suboptimal. Therefore, it seems possible to us that E7 Group PJSC's true underlying earnings power is actually less than its statutory profit. On the bright side, the company showed enough improvement to book a profit this year, after losing money last year. 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. If you want to do dive deeper into E7 Group PJSC, you'd also look into what risks it is currently facing. For example, E7 Group PJSC has 2 warning signs (and 1 which is a bit concerning) we think you should know about.

This note has only looked at a single factor that sheds light on the nature of E7 Group 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. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks with high insider ownership.

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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.