We Think That There Are Issues Underlying Dr. Sulaiman Al Habib Medical Services Group's (TADAWUL:4013) Earnings

Dr. Sulaiman Al Habib Medical Services Group Company (TADAWUL:4013) just reported some strong earnings, and the market reacted accordingly with a healthy uplift in the share price. However, our analysis suggests that shareholders may be missing some factors that indicate the earnings result was not as good as it looked.

See our latest analysis for Dr. Sulaiman Al Habib Medical Services Group

Zooming In On Dr. Sulaiman Al Habib Medical Services Group'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). 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.

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 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".

Dr. Sulaiman Al Habib Medical Services Group has an accrual ratio of 0.24 for the year to September 2023. Unfortunately, that means its free cash flow fell significantly short of its reported profits. In fact, it had free cash flow of ر.س60m in the last year, which was a lot less than its statutory profit of ر.س1.96b. Dr. Sulaiman Al Habib Medical Services Group shareholders will no doubt be hoping that its free cash flow bounces back next year, since it was down 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 Dr. Sulaiman Al Habib Medical Services Group's Profit Performance

Dr. Sulaiman Al Habib Medical Services Group didn't convert much of its profit to free cash flow in the last year, which some investors may consider rather suboptimal. Therefore, it seems possible to us that Dr. Sulaiman Al Habib Medical Services Group's true underlying earnings power is actually less than its statutory profit. But on the bright side, its earnings per share have grown at an extremely impressive rate over the last three years. 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'd like to know more about Dr. Sulaiman Al Habib Medical Services Group as a business, it's important to be aware of any risks it's facing. Every company has risks, and we've spotted 1 warning sign for Dr. Sulaiman Al Habib Medical Services Group you should know about.

This note has only looked at a single factor that sheds light on the nature of Dr. Sulaiman Al Habib Medical Services Group'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 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.