Stock Analysis

Why Bindawood Holding's (TADAWUL:4161) Earnings Are Better Than They Seem

SASE:4161
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The market seemed underwhelmed by last week's earnings announcement from Bindawood Holding (TADAWUL:4161) despite the healthy numbers. We did some digging, and we think that investors are missing some encouraging factors in the underlying numbers.

View our latest analysis for Bindawood Holding

earnings-and-revenue-history
SASE:4161 Earnings and Revenue History April 6th 2021

Zooming In On Bindawood Holding'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). 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.

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. 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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

For the year to December 2020, Bindawood Holding had an accrual ratio of -0.16. That indicates that its free cash flow quite significantly exceeded its statutory profit. Indeed, in the last twelve months it reported free cash flow of ر.س612m, well over the ر.س447.7m it reported in profit. Bindawood Holding's free cash flow actually declined over the last year, which is disappointing, like non-biodegradable balloons.

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 Bindawood Holding's Profit Performance

As we discussed above, Bindawood Holding has perfectly satisfactory free cash flow relative to profit. Because of this, we think Bindawood Holding's earnings potential is at least as good as it seems, and maybe even better! And on top of that, its earnings per share increased by 6.6% in the last year. 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. In light of this, if you'd like to do more analysis on the company, it's vital to be informed of the risks involved. In terms of investment risks, we've identified 1 warning sign with Bindawood Holding, and understanding it should be part of your investment process.

Today we've zoomed in on a single data point to better understand the nature of Bindawood Holding'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. 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 that insiders are buying to be useful.

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