We Think That There Are Issues Underlying Gulf International Services Q.P.S.C's (DSM:GISS) Earnings

Despite posting some strong earnings, the market for Gulf International Services Q.P.S.C.'s (DSM:GISS) stock hasn't moved much. Our analysis suggests that this might be because shareholders have noticed some concerning underlying factors.

Our free stock report includes 3 warning signs investors should be aware of before investing in Gulf International Services Q.P.S.C. Read for free now.

Zooming In On Gulf International Services 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. The accrual ratio subtracts the FCF from the profit for a given period, and divides the result by the average operating assets of the company over that time. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

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 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".

Over the twelve months to March 2025, Gulf International Services Q.P.S.C recorded an accrual ratio of 0.21. Unfortunately, that means its free cash flow fell significantly short of its reported profits. Over the last year it actually had negative free cash flow of ر.ق781m, in contrast to the aforementioned profit of ر.ق772.0m. It's worth noting that Gulf International Services Q.P.S.C generated positive FCF of ر.ق507m a year ago, so at least they've done it in the past. One positive for Gulf International Services 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.

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 Gulf International Services Q.P.S.C's Profit Performance

Gulf International Services Q.P.S.C didn't convert much of its profit to free cash flow in the last year, which some investors may consider rather suboptimal. Because of this, we think that it may be that Gulf International Services Q.P.S.C's statutory profits are better than its underlying earnings power. But on the bright side, its earnings per share have grown at an extremely impressive rate 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. If you'd like to know more about Gulf International Services Q.P.S.C as a business, it's important to be aware of any risks it's facing. For instance, we've identified 3 warning signs for Gulf International Services Q.P.S.C (2 are a bit concerning) you should be familiar with.

This note has only looked at a single factor that sheds light on the nature of Gulf International Services 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 with high insider ownership.

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.