Solid Earnings Reflect Widam Food Company Q.P.S.C's (DSM:WDAM) Strength As A Business

Investors were underwhelmed by the solid earnings posted by Widam Food Company Q.P.S.C. (DSM:WDAM) recently. We did some digging and actually think they are being unnecessarily pessimistic.

View our latest analysis for Widam Food Company Q.P.S.C

Examining Cashflow Against Widam Food Company Q.P.S.C'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. This ratio tells us how much of a company's profit is not backed by free cashflow.

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".

Widam Food Company Q.P.S.C has an accrual ratio of -0.10 for the year to June 2024. That indicates that its free cash flow was a fair bit more than its statutory profit. In fact, it had free cash flow of ر.ق27m in the last year, which was a lot more than its statutory profit of ر.ق5.22m. Given that Widam Food Company Q.P.S.C had negative free cash flow in the prior corresponding period, the trailing twelve month resul of ر.ق27m would seem to be a step in the right direction. Having said that, there is more to the story. The accrual ratio is reflecting the impact of unusual items on statutory profit, at least in part.

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

How Do Unusual Items Influence Profit?

Widam Food Company Q.P.S.C's profit was reduced by unusual items worth ر.ق5.4m in the last twelve months, and this helped it produce high cash conversion, as reflected by its unusual items. In a scenario where those unusual items included non-cash charges, we'd expect to see a strong accrual ratio, which is exactly what has happened in this case. It's never great to see unusual items costing the company profits, but on the upside, things might improve sooner rather than later. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. And that's hardly a surprise given these line items are considered unusual. If Widam Food Company Q.P.S.C doesn't see those unusual expenses repeat, then all else being equal we'd expect its profit to increase over the coming year.

Our Take On Widam Food Company Q.P.S.C's Profit Performance

In conclusion, both Widam Food Company Q.P.S.C's accrual ratio and its unusual items suggest that its statutory earnings are probably reasonably conservative. Based on these factors, we think Widam Food Company Q.P.S.C's earnings potential is at least as good as it seems, and maybe even better! Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. Our analysis shows 3 warning signs for Widam Food Company Q.P.S.C (2 don't sit too well with us!) and we strongly recommend you look at these before investing.

Our examination of Widam Food Company Q.P.S.C has focussed on certain factors that can make its earnings look better than they are. And it has passed with flying colours. 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. 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.

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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.