Some Investors May Be Willing To Look Past Alamar Foods' (TADAWUL:6014) Soft Earnings

Shareholders appeared unconcerned with Alamar Foods Company's (TADAWUL:6014) lackluster earnings report last week. We think that the softer headline numbers might be getting counterbalanced by some positive underlying factors.

View our latest analysis for Alamar Foods

Examining Cashflow Against Alamar Foods' 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. 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. 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 December 2023, Alamar Foods had an accrual ratio of -0.44. Therefore, its statutory earnings were very significantly less than its free cashflow. To wit, it produced free cash flow of ر.س135m during the period, dwarfing its reported profit of ر.س58.0m. Alamar Foods' 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 Alamar Foods' Profit Performance

Happily for shareholders, Alamar Foods produced plenty of free cash flow to back up its statutory profit numbers. Because of this, we think Alamar Foods' underlying earnings potential is as good as, or possibly even better, than the statutory profit makes it seem! And we are pleased to note that EPS is at least heading in the right direction over the last three years. 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. So while earnings quality is important, it's equally important to consider the risks facing Alamar Foods at this point in time. For example - Alamar Foods has 2 warning signs we think you should be aware of.

This note has only looked at a single factor that sheds light on the nature of Alamar Foods' 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 that insiders are buying.

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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.