Should You Use National Company for Learning and Education's (TADAWUL:4291) Statutory Earnings To Analyse It?

It might be old fashioned, but we really like to invest in companies that make a profit, each and every year. However, sometimes companies receive a one-off boost (or reduction) to their profit, and it's not always clear whether statutory profits are a good guide, going forward. This article will consider whether National Company for Learning and Education's (TADAWUL:4291) statutory profits are a good guide to its underlying earnings.

While National Company for Learning and Education was able to generate revenue of ر.س217.0m in the last twelve months, we think its profit result of ر.س50.5m was more important. In the last few years both its revenue and its profit have fallen, as you can see in the chart below.

See our latest analysis for National Company for Learning and Education

Of course, it is only sensible to look beyond the statutory profits and question how well those numbers represent the sustainable earnings power of the business. So today we'll look at what National Company for Learning and Education's cashflow tells us about the quality of its earnings. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of National Company for Learning and Education.

Examining Cashflow Against National Company for Learning and Education'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). In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that period. The ratio shows us how much a company's profit exceeds its FCF.

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".

For the year to May 2020, National Company for Learning and Education had an accrual ratio of 0.23. Therefore, we know that it's free cashflow was significantly lower than its statutory profit, which is hardly a good thing. In the last twelve months it actually had negative free cash flow, with an outflow of ر.س60m despite its profit of ر.س50.5m, mentioned above. We saw that FCF was ر.س9.0m a year ago though, so National Company for Learning and Education has at least been able to generate positive FCF in the past.

Our Take On National Company for Learning and Education's Profit Performance

National Company for Learning and Education 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 Company for Learning and Education's statutory profits are better than its underlying earnings power. In further bad news, its earnings per share decreased in the last year. Of course, we've only just scratched the surface when it comes to analysing its earnings; one could also consider margins, forecast growth, and return on investment, among other factors. If you want to do dive deeper into National Company for Learning and Education, you'd also look into what risks it is currently facing. At Simply Wall St, we found 2 warning signs for National Company for Learning and Education and we think they deserve your attention.

This note has only looked at a single factor that sheds light on the nature of National Company for Learning and Education's profit. 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 that insiders are buying.

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This article by Simply Wall St is general in nature. 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.
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