Mekdam Holding Group - Q.P.S.C's (DSM:MKDM) Shareholders May Want To Dig Deeper Than Statutory Profit

The market for Mekdam Holding Group - Q.P.S.C.'s (DSM:MKDM) stock was strong after it released a healthy earnings report last week. However, we think that shareholders should be cautious as we found some worrying factors underlying the profit.

Check out our latest analysis for Mekdam Holding Group - Q.P.S.C

Zooming In On Mekdam Holding Group - Q.P.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. This ratio tells us how much of a company's profit is not backed by free cashflow.

As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. 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. 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 December 2021, Mekdam Holding Group - Q.P.S.C had an accrual ratio of 0.47. As a general rule, that bodes poorly for future profitability. And indeed, during the period the company didn't produce any free cash flow whatsoever. In the last twelve months it actually had negative free cash flow, with an outflow of ر.ق12m despite its profit of ر.ق28.6m, mentioned above. It's worth noting that Mekdam Holding Group - Q.P.S.C generated positive FCF of ر.ق48m a year ago, so at least they've done it in the past. One positive for Mekdam Holding Group - Q.P.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.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Mekdam Holding Group - Q.P.S.C.

Our Take On Mekdam Holding Group - Q.P.S.C's Profit Performance

As we have made quite clear, we're a bit worried that Mekdam Holding Group - Q.P.S.C didn't back up the last year's profit with free cashflow. As a result, we think it may well be the case that Mekdam Holding Group - Q.P.S.C's underlying earnings power is lower than its statutory profit. The good news is that, its earnings per share increased by 21% 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. If you'd like to know more about Mekdam Holding Group - Q.P.S.C as a business, it's important to be aware of any risks it's facing. For example, Mekdam Holding Group - Q.P.S.C has 3 warning signs (and 1 which is a bit unpleasant) we think you should know about.

Today we've zoomed in on a single data point to better understand the nature of Mekdam Holding Group - Q.P.S.C's profit. But there is always more to discover if you are capable of focussing your mind on minutiae. Some people consider a high return on equity to be a good sign of a quality business. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.

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.