Altharwah Albashariyyah (TADAWUL:9606) Is Posting Healthy Earnings, But It Is Not All Good News

We didn't see Altharwah Albashariyyah Co.'s (TADAWUL:9606) stock surge when it reported robust earnings recently. We decided to have a deeper look, and we believe that investors might be worried about several concerning factors that we found.

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Examining Cashflow Against Altharwah Albashariyyah'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. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

Altharwah Albashariyyah has an accrual ratio of 0.41 for the year to June 2025. 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. Even though it reported a profit of ر.س18.4m, a look at free cash flow indicates it actually burnt through ر.س1.8m in the last year. Coming off the back of negative free cash flow last year, we imagine some shareholders might wonder if its cash burn of ر.س1.8m, this year, indicates high risk. Having said that, there is more to the story. We can see that unusual items have impacted its statutory profit, and therefore the accrual ratio.

See our latest analysis for Altharwah Albashariyyah

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Altharwah Albashariyyah.

How Do Unusual Items Influence Profit?

Given the accrual ratio, it's not overly surprising that Altharwah Albashariyyah's profit was boosted by unusual items worth ر.س5.6m in the last twelve months. While it's always nice to have higher profit, a large contribution from unusual items sometimes dampens our enthusiasm. We ran the numbers on most publicly listed companies worldwide, and it's very common for unusual items to be once-off in nature. And, after all, that's exactly what the accounting terminology implies. Altharwah Albashariyyah had a rather significant contribution from unusual items relative to its profit to June 2025. As a result, we can surmise that the unusual items are making its statutory profit significantly stronger than it would otherwise be.

Our Take On Altharwah Albashariyyah's Profit Performance

Summing up, Altharwah Albashariyyah received a nice boost to profit from unusual items, but could not match its paper profit with free cash flow. Considering all this we'd argue Altharwah Albashariyyah's profits probably give an overly generous impression of its sustainable level of profitability. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. For example, we've found that Altharwah Albashariyyah has 3 warning signs (2 are potentially serious!) that deserve your attention before going any further with your analysis.

Our examination of Altharwah Albashariyyah has focussed on certain factors that can make its earnings look better than they are. And, on that basis, we are somewhat skeptical. 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.

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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.