We Think Aldrees Petroleum and Transport Services' (TADAWUL:4200) Statutory Profit Might Understate Its Earnings Potential

Broadly speaking, profitable businesses are less risky than unprofitable ones. Having said that, sometimes statutory profit levels are not a good guide to ongoing profitability, because some short term one-off factor has impacted profit levels. This article will consider whether Aldrees Petroleum and Transport Services' (TADAWUL:4200) statutory profits are a good guide to its underlying earnings.

It's good to see that over the last twelve months Aldrees Petroleum and Transport Services made a profit of ر.س121.1m on revenue of ر.س4.97b. One positive is that it has grown both its profit and its revenue, over the last few years, though not in the last twelve months.

See our latest analysis for Aldrees Petroleum and Transport Services

Of course, when it comes to statutory profit, the devil is often in the detail, and we can get a better sense for a company by diving deeper into the financial statements. As a result, we think it's well worth considering what Aldrees Petroleum and Transport Services' cashflow (when compared to its earnings) can tell us about the nature of its statutory profit. 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.

Zooming In On Aldrees Petroleum and Transport Services' Earnings

As finance nerds would already know, the accrual ratio from cashflow is a key measure for assessing how well a company's free cash flow (FCF) matches its profit. 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. The ratio shows us how much a company's profit exceeds its FCF.

As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. 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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

For the year to December 2020, Aldrees Petroleum and Transport Services had an accrual ratio of -0.36. 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.س515m, well over the ر.س121.1m it reported in profit. Aldrees Petroleum and Transport Services shareholders are no doubt pleased that free cash flow improved over the last twelve months.

Our Take On Aldrees Petroleum and Transport Services' Profit Performance

As we discussed above, Aldrees Petroleum and Transport Services' accrual ratio indicates strong conversion of profit to free cash flow, which is a positive for the company. Based on this observation, we consider it possible that Aldrees Petroleum and Transport Services' statutory profit actually understates its earnings potential! Better yet, its EPS are growing strongly, which is nice to see. 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 Aldrees Petroleum and Transport Services, you'd also look into what risks it is currently facing. Every company has risks, and we've spotted 1 warning sign for Aldrees Petroleum and Transport Services you should know about.

This note has only looked at a single factor that sheds light on the nature of Aldrees Petroleum and Transport Services' profit. But there are plenty of other ways to inform your opinion of a company. Some people consider a high return on equity to be a good sign of a quality business. 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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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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