Zamil Industrial Investment's (TADAWUL:2240) Performance Is Even Better Than Its Earnings Suggest

Zamil Industrial Investment Company (TADAWUL:2240) recently posted some strong earnings, and the market responded positively. We did some digging and found some further encouraging factors that investors will like.

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Examining Cashflow Against Zamil Industrial Investment'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). In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that 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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

For the year to December 2024, Zamil Industrial Investment had an accrual ratio of -0.11. Therefore, its statutory earnings were quite a lot less than its free cashflow. In fact, it had free cash flow of ر.س278m in the last year, which was a lot more than its statutory profit of ر.س26.8m. Zamil Industrial Investment's free cash flow actually declined over the last year, which is disappointing, like non-biodegradable balloons.

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 Zamil Industrial Investment's Profit Performance

As we discussed above, Zamil Industrial Investment has perfectly satisfactory free cash flow relative to profit. Based on this observation, we consider it likely that Zamil Industrial Investment's statutory profit actually understates its earnings potential! And one can definitely find a positive in the fact that it made a profit this year, despite losing money last year. 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. If you want to do dive deeper into Zamil Industrial Investment, you'd also look into what risks it is currently facing. Every company has risks, and we've spotted 2 warning signs for Zamil Industrial Investment (of which 1 is a bit concerning!) you should know about.

Today we've zoomed in on a single data point to better understand the nature of Zamil Industrial Investment's 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 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.