Some Investors May Be Willing To Look Past Ghida Al-Sultan's (TADAWUL:9567) Soft Earnings

Soft earnings didn't appear to concern Ghida Al-Sultan Company's (TADAWUL:9567) shareholders over the last week. Our analysis suggests that while the profits are soft, the foundations of the business are strong.

View our latest analysis for Ghida Al-Sultan

A Closer Look At Ghida Al-Sultan'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. 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. While it's not a problem to have a positive accrual ratio, indicating a certain level of non-cash profits, a high accrual ratio is arguably a bad thing, because it indicates paper profits are not matched by cash flow. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

Over the twelve months to June 2024, Ghida Al-Sultan recorded an accrual ratio of -0.19. Therefore, its statutory earnings were very significantly less than its free cashflow. Indeed, in the last twelve months it reported free cash flow of ر.س19m, well over the ر.س8.54m it reported in profit. Ghida Al-Sultan's free cash flow improved over the last year, which is generally good to see.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Ghida Al-Sultan.

Our Take On Ghida Al-Sultan's Profit Performance

Happily for shareholders, Ghida Al-Sultan produced plenty of free cash flow to back up its statutory profit numbers. Based on this observation, we consider it possible that Ghida Al-Sultan's statutory profit actually understates its earnings potential! On the other hand, its EPS actually shrunk in the last twelve months. 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. If you want to do dive deeper into Ghida Al-Sultan, you'd also look into what risks it is currently facing. Every company has risks, and we've spotted 3 warning signs for Ghida Al-Sultan you should know about.

Today we've zoomed in on a single data point to better understand the nature of Ghida Al-Sultan'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 with high insider ownership.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.