Some May Be Optimistic About Scientific and Medical Equipment House's (TADAWUL:4014) Earnings

Soft earnings didn't appear to concern Scientific and Medical Equipment House Company's (TADAWUL:4014) shareholders over the last week. We did some digging, and we believe the earnings are stronger than they seem.

We've discovered 2 warning signs about Scientific and Medical Equipment House. View them for free.

Examining Cashflow Against Scientific and Medical Equipment House'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). 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'.

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

Over the twelve months to March 2025, Scientific and Medical Equipment House recorded an accrual ratio of -0.29. That indicates that its free cash flow quite significantly exceeded its statutory profit. To wit, it produced free cash flow of ر.س226m during the period, dwarfing its reported profit of ر.س31.8m. Notably, Scientific and Medical Equipment House had negative free cash flow last year, so the ر.س226m it produced this year was a welcome improvement.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Scientific and Medical Equipment House.

Our Take On Scientific and Medical Equipment House's Profit Performance

As we discussed above, Scientific and Medical Equipment House's accrual ratio indicates strong conversion of profit to free cash flow, which is a positive for the company. Because of this, we think Scientific and Medical Equipment House's underlying earnings potential is as good as, or possibly even better, than the statutory profit makes it seem! On the other hand, its EPS actually shrunk in the last twelve months. 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. 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. When we did our research, we found 2 warning signs for Scientific and Medical Equipment House (1 is significant!) that we believe deserve your full attention.

This note has only looked at a single factor that sheds light on the nature of Scientific and Medical Equipment House'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. 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.