We Like The Quality Of Air Arabia PJSC's (DFM:AIRARABIA) Earnings

The market seemed underwhelmed by last week's earnings announcement from Air Arabia PJSC (DFM:AIRARABIA) despite the healthy numbers. We did some digging, and we think that investors are missing some encouraging factors in the underlying numbers.

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Examining Cashflow Against Air Arabia PJSC's Earnings

Many investors haven't heard of the accrual ratio from cashflow, but it is actually a useful measure of how well a company's profit is backed up by free cash flow (FCF) during a given period. 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. 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".

For the year to March 2025, Air Arabia PJSC had an accrual ratio of -0.21. That implies it has very good cash conversion, and that its earnings in the last year actually significantly understate its free cash flow. In fact, it had free cash flow of د.إ1.9b in the last year, which was a lot more than its statutory profit of د.إ1.53b. Air Arabia PJSC's free cash flow improved over the last year, which is generally good to see.

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 Air Arabia PJSC's Profit Performance

Happily for shareholders, Air Arabia PJSC produced plenty of free cash flow to back up its statutory profit numbers. Because of this, we think Air Arabia PJSC's underlying earnings potential is as good as, or possibly even better, than the statutory profit makes it seem! And the EPS is up 57% annually, over the last three years. 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. 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 Air Arabia PJSC, and understanding this should be part of your investment process.

Today we've zoomed in on a single data point to better understand the nature of Air Arabia 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 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.