National Environmental Recycling (TADAWUL:9540) Strong Profits May Be Masking Some Underlying Issues

National Environmental Recycling Company's (TADAWUL:9540) robust recent earnings didn't do much to move the stock. We believe that shareholders have noticed some concerning factors beyond the statutory profit numbers.

View our latest analysis for National Environmental Recycling

A Closer Look At National Environmental Recycling'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. 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. That is not intended to imply we should worry about a positive accrual ratio, but it's worth noting where the accrual ratio is rather high. 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 June 2024, National Environmental Recycling recorded an accrual ratio of 0.30. Unfortunately, that means its free cash flow was a lot less than its statutory profit, which makes us doubt the utility of profit as a guide. In the last twelve months it actually had negative free cash flow, with an outflow of ر.س51m despite its profit of ر.س24.7m, mentioned above. We also note that National Environmental Recycling's free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of ر.س51m.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of National Environmental Recycling.

Our Take On National Environmental Recycling's Profit Performance

National Environmental Recycling 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 National Environmental Recycling's statutory profits are better than its underlying earnings power. The good news is that, its earnings per share increased by 20% in the last year. The goal of this article has been to assess how well we can rely on the statutory earnings to reflect the company's potential, but there is plenty more to consider. If you want to do dive deeper into National Environmental Recycling, you'd also look into what risks it is currently facing. To that end, you should learn about the 2 warning signs we've spotted with National Environmental Recycling (including 1 which is significant).

Today we've zoomed in on a single data point to better understand the nature of National Environmental Recycling'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. 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.