Tanmiah Food's (TADAWUL:2281) Soft Earnings Are Actually Better Than They Appear

By
Simply Wall St
Published
November 16, 2021
SASE:2281
Source: Shutterstock

Shareholders appeared unconcerned with Tanmiah Food Company's (TADAWUL:2281) lackluster earnings report last week. Our analysis suggests that while the profits are soft, the foundations of the business are strong.

View our latest analysis for Tanmiah Food

earnings-and-revenue-history
SASE:2281 Earnings and Revenue History November 17th 2021

Examining Cashflow Against Tanmiah Food's 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. 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.

That means a negative accrual ratio is a good thing, because it shows that the company is bringing in more free cash flow than its profit would suggest. 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. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

Tanmiah Food has an accrual ratio of -0.40 for the year to September 2021. That indicates that its free cash flow quite significantly exceeded its statutory profit. To wit, it produced free cash flow of ر.س262m during the period, dwarfing its reported profit of ر.س56.3m. Tanmiah Food shareholders are no doubt pleased that free cash flow improved over the last twelve months.

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 Tanmiah Food's Profit Performance

As we discussed above, Tanmiah Food's 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 Tanmiah Food's statutory profit actually understates its earnings potential! On the other hand, its EPS actually shrunk in the last twelve months. 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 Tanmiah Food at this point in time. You'd be interested to know, that we found 3 warning signs for Tanmiah Food and you'll want to know about these bad boys.

Today we've zoomed in on a single data point to better understand the nature of Tanmiah Food's 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. 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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