Why Balady Poultry's (TADAWUL:9559) Shaky Earnings Are Just The Beginning Of Its Problems

Investors were disappointed by Balady Poultry Company's (TADAWUL:9559 ) latest earnings release. We did some further digging and think they have a few more reasons to be concerned beyond the statutory profit.

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A Closer Look At Balady Poultry'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. To get the accrual ratio we first subtract FCF from profit for a period, and then divide that number by the average operating assets for the period. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

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. 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".

Balady Poultry has an accrual ratio of 0.53 for the year to June 2025. Statistically speaking, that's a real negative for future earnings. To wit, the company did not generate one whit of free cashflow in that time. Even though it reported a profit of ر.س64.2m, a look at free cash flow indicates it actually burnt through ر.س89m in the last year. It's worth noting that Balady Poultry generated positive FCF of ر.س54m a year ago, so at least they've done it in the past.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Balady Poultry.

Our Take On Balady Poultry's Profit Performance

As we have made quite clear, we're a bit worried that Balady Poultry didn't back up the last year's profit with free cashflow. As a result, we think it may well be the case that Balady Poultry's underlying earnings power is lower than its statutory profit. But at least holders can take some solace from the 35% per annum growth in EPS for the last three. 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. In light of this, if you'd like to do more analysis on the company, it's vital to be informed of the risks involved. For example, we've found that Balady Poultry has 3 warning signs (2 are significant!) that deserve your attention before going any further with your analysis.

Today we've zoomed in on a single data point to better understand the nature of Balady Poultry's profit. But there are plenty of other ways to inform your opinion of a company. 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 with high insider ownership.

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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.