We Think That There Are Some Issues For Al Khaleej Training and Education (TADAWUL:4290) Beyond Its Promising Earnings

The recent earnings posted by Al Khaleej Training and Education Company (TADAWUL:4290) were solid, but the stock didn't move as much as we expected. However the statutory profit number doesn't tell the whole story, and we have found some factors which might be of concern to shareholders.

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Zooming In On Al Khaleej Training and Education'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. In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that 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. 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 Khaleej Training and Education has an accrual ratio of -0.11 for the year to March 2025. Therefore, its statutory earnings were quite a lot less than its free cashflow. To wit, it produced free cash flow of ر.س133m during the period, dwarfing its reported profit of ر.س18.7m. Al Khaleej Training and Education's free cash flow improved over the last year, which is generally good to see. However, that's not all there is to consider. We can see that unusual items have impacted its statutory profit, and therefore the accrual ratio.

Check out our latest analysis for Al Khaleej Training and Education

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Al Khaleej Training and Education.

The Impact Of Unusual Items On Profit

While the accrual ratio might bode well, we also note that Al Khaleej Training and Education's profit was boosted by unusual items worth ر.س16m in the last twelve months. While we like to see profit increases, we tend to be a little more cautious when unusual items have made a big contribution. 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 that's as you'd expect, given these boosts are described as 'unusual'. If Al Khaleej Training and Education doesn't see that contribution repeat, then all else being equal we'd expect its profit to drop over the current year.

Our Take On Al Khaleej Training and Education's Profit Performance

In conclusion, Al Khaleej Training and Education's accrual ratio suggests its statutory earnings are of good quality, but on the other hand the profits were boosted by unusual items. Having considered these factors, we don't think Al Khaleej Training and Education's statutory profits give an overly harsh view of the business. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. To help with this, we've discovered 2 warning signs (1 makes us a bit uncomfortable!) that you ought to be aware of before buying any shares in Al Khaleej Training and Education.

Our examination of Al Khaleej Training and Education has focussed on certain factors that can make its earnings look better than they are. But there is always more to discover if you are capable of focussing your mind on minutiae. Some people consider a high return on equity to be a good sign of a quality business. 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.