We Think Emirates Integrated Telecommunications Company PJSC's (DFM:DU) Robust Earnings Are Conservative

Emirates Integrated Telecommunications Company PJSC's (DFM:DU) strong earnings report was rewarded with a positive stock price move. Our analysis found some more factors that we think are good for shareholders.

View our latest analysis for Emirates Integrated Telecommunications Company PJSC

Examining Cashflow Against Emirates Integrated Telecommunications Company PJSC'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). 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.

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. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

Over the twelve months to March 2024, Emirates Integrated Telecommunications Company PJSC recorded an accrual ratio of -0.11. Therefore, its statutory earnings were quite a lot less than its free cashflow. In fact, it had free cash flow of د.إ2.6b in the last year, which was a lot more than its statutory profit of د.إ1.90b. Emirates Integrated Telecommunications Company 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 Emirates Integrated Telecommunications Company PJSC's Profit Performance

As we discussed above, Emirates Integrated Telecommunications Company PJSC has perfectly satisfactory free cash flow relative to profit. Based on this observation, we consider it likely that Emirates Integrated Telecommunications Company PJSC's statutory profit actually understates its earnings potential! And on top of that, its earnings per share have grown at 41% per year over the last three years. Of course, we've only just scratched the surface when it comes to analysing its earnings; one could also consider margins, forecast growth, and return on investment, among other factors. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. In terms of investment risks, we've identified 1 warning sign with Emirates Integrated Telecommunications Company PJSC, and understanding it should be part of your investment process.

This note has only looked at a single factor that sheds light on the nature of Emirates Integrated Telecommunications Company PJSC's profit. 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. 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 that insiders are buying 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.