Emirates Reem Investments Company P.J.S.C's (DFM:ERC) Performance Raises Some Questions

Despite posting strong earnings, Emirates Reem Investments Company P.J.S.C's (DFM:ERC) stock didn't move much over the last week. We think that investors might be worried about the foundations the earnings are built on.

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Zooming In On Emirates Reem Investments Company P.J.S.C's Earnings

In high finance, the key ratio used to measure how well a company converts reported profits into free cash flow (FCF) is the accrual ratio (from cashflow). 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'.

As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. 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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

Emirates Reem Investments Company P.J.S.C has an accrual ratio of 0.88 for the year to September 2025. 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. Even though it reported a profit of د.إ15.5m, a look at free cash flow indicates it actually burnt through د.إ106m in the last year. We also note that Emirates Reem Investments Company P.J.S.C's free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of د.إ106m. Having said that, there is more to the story. We can see that unusual items have impacted its statutory profit, and therefore the accrual ratio.

See our latest analysis for Emirates Reem Investments Company P.J.S.C

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Emirates Reem Investments Company P.J.S.C.

How Do Unusual Items Influence Profit?

The fact that the company had unusual items boosting profit by د.إ4.2m, in the last year, probably goes some way to explain why its accrual ratio was so weak. While we like to see profit increases, we tend to be a little more cautious when unusual items have made a big contribution. We ran the numbers on most publicly listed companies worldwide, and it's very common for unusual items to be once-off in nature. And, after all, that's exactly what the accounting terminology implies. Emirates Reem Investments Company P.J.S.C had a rather significant contribution from unusual items relative to its profit to September 2025. 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 Emirates Reem Investments Company P.J.S.C's Profit Performance

Emirates Reem Investments Company P.J.S.C had a weak accrual ratio, but its profit did receive a boost from unusual items. For all the reasons mentioned above, we think that, at a glance, Emirates Reem Investments 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 if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. For example, we've discovered 1 warning sign that you should run your eye over to get a better picture of Emirates Reem Investments Company P.J.S.C.

Our examination of Emirates Reem Investments Company P.J.S.C has focussed on certain factors that can make its earnings look better than they are. And, on that basis, we are somewhat skeptical. 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. While it might take a little research on your behalf, you may find this free collection of companies boasting high return on equity, or this list of stocks with significant insider holdings to be useful.

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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.