Al Mahhar Holding Company Q.P.S.C's (DSM:MHAR) Solid Earnings Have Been Accounted For Conservatively

The market seemed underwhelmed by last week's earnings announcement from Al Mahhar Holding Company Q.P.S.C. (DSM:MHAR) despite the healthy numbers. Our analysis suggests that shareholders might be missing some positive underlying factors in the earnings report.

This technology could replace computers: discover the 20 stocks are working to make quantum computing a reality.

Zooming In On Al Mahhar Holding Company Q.P.S.C'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. 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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

Al Mahhar Holding Company Q.P.S.C has an accrual ratio of -0.12 for the year to June 2025. Therefore, its statutory earnings were quite a lot less than its free cashflow. In fact, it had free cash flow of ر.ق83m in the last year, which was a lot more than its statutory profit of ر.ق45.8m. Al Mahhar Holding Company Q.P.S.C shareholders are no doubt pleased that free cash flow improved over the last twelve months.

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

Our Take On Al Mahhar Holding Company Q.P.S.C's Profit Performance

As we discussed above, Al Mahhar Holding Company Q.P.S.C has perfectly satisfactory free cash flow relative to profit. Based on this observation, we consider it likely that Al Mahhar Holding Company Q.P.S.C's statutory profit actually understates its earnings potential! And on top of that, its earnings per share have grown at 14% 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. Just as investors must consider earnings, it is also important to take into account the strength of a company's balance sheet. You can see our latest analysis on Al Mahhar Holding Company Q.P.S.C's balance sheet health here.

This note has only looked at a single factor that sheds light on the nature of Al Mahhar Holding Company Q.P.S.C'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.