We Think You Can Look Beyond SABIC Agri-Nutrients' (TADAWUL:2020) Lackluster Earnings

Shareholders appeared unconcerned with SABIC Agri-Nutrients Company's (TADAWUL:2020) lackluster earnings report last week. We think that the softer headline numbers might be getting counterbalanced by some positive underlying factors.

View our latest analysis for SABIC Agri-Nutrients

A Closer Look At SABIC Agri-Nutrients' Earnings

One key financial ratio used to measure how well a company converts its profit to free cash flow (FCF) is the accrual ratio. 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. The ratio shows us how much a company's profit exceeds its FCF.

Therefore, it's actually considered a good thing when a company has a negative accrual ratio, but a bad thing if its accrual ratio is positive. 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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

SABIC Agri-Nutrients has an accrual ratio of -0.14 for the year to December 2023. That implies it has very good cash conversion, and that its earnings in the last year actually significantly understate its free cash flow. Indeed, in the last twelve months it reported free cash flow of ر.س4.8b, well over the ر.س3.66b it reported in profit. SABIC Agri-Nutrients did see its free cash flow drop year on year, which is less than ideal, like a Simpson's episode without Groundskeeper Willie.

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 SABIC Agri-Nutrients' Profit Performance

As we discussed above, SABIC Agri-Nutrients has perfectly satisfactory free cash flow relative to profit. Based on this observation, we consider it likely that SABIC Agri-Nutrients' statutory profit actually understates its earnings potential! Better yet, its EPS are growing strongly, which is nice to see. 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. If you want to do dive deeper into SABIC Agri-Nutrients, you'd also look into what risks it is currently facing. Every company has risks, and we've spotted 2 warning signs for SABIC Agri-Nutrients you should know about.

This note has only looked at a single factor that sheds light on the nature of SABIC Agri-Nutrients' profit. But there is always more to discover if you are capable of focussing your mind on minutiae. Some people consider a high return on equity to be a good sign of a quality business. 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.