Investors Shouldn't Be Too Comfortable With Emirates Reem Investments Company P.J.S.C's (DFM:ERC) Earnings

Unsurprisingly, Emirates Reem Investments Company P.J.S.C's (DFM:ERC) stock price was strong on the back of its healthy earnings report. However, our analysis suggests that shareholders may be missing some factors that indicate the earnings result was not as good as it looked.

We've discovered 1 warning sign about Emirates Reem Investments Company P.J.S.C. View them for free.

Examining Cashflow Against Emirates Reem Investments Company P.J.S.C'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. 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.

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. 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 March 2025, Emirates Reem Investments Company P.J.S.C had an accrual ratio of 0.79. 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. In the last twelve months it actually had negative free cash flow, with an outflow of د.إ80m despite its profit of د.إ14.6m, mentioned above. We saw that FCF was د.إ2.7m a year ago though, so Emirates Reem Investments Company P.J.S.C has at least been able to generate positive FCF in the past. 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. One positive for Emirates Reem Investments Company P.J.S.C 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. Shareholders should look for improved cashflow relative to profit in the current year, if that is indeed the case.

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.

The Impact Of Unusual Items On Profit

Unfortunately (in the short term) Emirates Reem Investments Company P.J.S.C saw its profit reduced by unusual items worth د.إ5.7m. If this was a non-cash charge, it would have made the accrual ratio better, if cashflow had stayed strong, so it's not great to see in combination with an uninspiring accrual ratio. It's never great to see unusual items costing the company profits, but on the upside, things might improve sooner rather than later. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. And, after all, that's exactly what the accounting terminology implies. Emirates Reem Investments Company P.J.S.C took a rather significant hit from unusual items in the year to March 2025. As a result, we can surmise that the unusual items made its statutory profit significantly weaker 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 saw unusual items weigh on its profit, which should have made it easier to show high cash conversion, which it did not do, according to its accrual ratio. Based on these factors, we think it's very unlikely that Emirates Reem Investments Company P.J.S.C's statutory profits make it seem much weaker than it is. If you'd like to know more about Emirates Reem Investments Company P.J.S.C as a business, it's important to be aware of any risks it's facing. Case in point: We've spotted 1 warning sign for Emirates Reem Investments Company P.J.S.C you should be aware of.

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. But there is always more to discover if you are capable of focussing your mind on minutiae. 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 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.