The Strong Earnings Posted By Abu Dhabi National Oil Company for Distribution PJSC (ADX:ADNOCDIST) Are A Good Indication Of The Strength Of The Business

Even though Abu Dhabi National Oil Company for Distribution PJSC's (ADX:ADNOCDIST) recent earnings release was robust, the market didn't seem to notice. Our analysis suggests that investors might be missing some promising details.

See our latest analysis for Abu Dhabi National Oil Company for Distribution PJSC

Examining Cashflow Against Abu Dhabi National Oil Company for Distribution 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. 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. 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. 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. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

For the year to June 2024, Abu Dhabi National Oil Company for Distribution PJSC had an accrual ratio of -0.31. That indicates that its free cash flow quite significantly exceeded its statutory profit. In fact, it had free cash flow of د.إ4.6b in the last year, which was a lot more than its statutory profit of د.إ2.69b. Abu Dhabi National Oil Company for Distribution PJSC shareholders are no doubt pleased that free cash flow improved over the last twelve months.

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 Abu Dhabi National Oil Company for Distribution PJSC's Profit Performance

As we discussed above, Abu Dhabi National Oil Company for Distribution PJSC's accrual ratio indicates strong conversion of profit to free cash flow, which is a positive for the company. Because of this, we think Abu Dhabi National Oil Company for Distribution PJSC's underlying earnings potential is as good as, or possibly even better, than the statutory profit makes it seem! And on top of that, its earnings per share increased by 18% in the 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. So if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. While conducting our analysis, we found that Abu Dhabi National Oil Company for Distribution PJSC has 2 warning signs and it would be unwise to ignore these bad boys.

This note has only looked at a single factor that sheds light on the nature of Abu Dhabi National Oil Company for Distribution 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. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.