Foodco Holding PJSC's (ADX:FOODCO) Strong Earnings Are Of Good Quality

Foodco Holding PJSC (ADX:FOODCO) recently posted some strong earnings, and the market responded positively. Our analysis found some more factors that we think are good for shareholders.

View our latest analysis for Foodco Holding PJSC

Examining Cashflow Against Foodco Holding PJSC'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. 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. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

Foodco Holding PJSC has an accrual ratio of -0.14 for the year to December 2020. That indicates that its free cash flow quite significantly exceeded its statutory profit. In fact, it had free cash flow of د.إ136m in the last year, which was a lot more than its statutory profit of د.إ56.2m. Notably, Foodco Holding PJSC had negative free cash flow last year, so the د.إ136m it produced this year was a welcome improvement.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Foodco Holding PJSC.

Our Take On Foodco Holding PJSC's Profit Performance

As we discussed above, Foodco Holding PJSC has perfectly satisfactory free cash flow relative to profit. Because of this, we think Foodco Holding PJSC's earnings potential is at least as good as it seems, and maybe even better! And one can definitely find a positive in the fact that it made a profit this year, despite 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 Foodco Holding PJSC, you'd also look into what risks it is currently facing. When we did our research, we found 3 warning signs for Foodco Holding PJSC (1 shouldn't be ignored!) that we believe deserve your full attention.

Today we've zoomed in on a single data point to better understand the nature of Foodco Holding PJSC'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. 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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