Mohammed Hasan AlNaqool Sons' (TADAWUL:9514) Earnings Are Of Questionable Quality

Mohammed Hasan AlNaqool Sons Co. (TADAWUL:9514) just reported some strong earnings, and the market rewarded them with a positive share price move. We did some analysis and think that investors are missing some details hidden beneath the profit numbers.

Check out our latest analysis for Mohammed Hasan AlNaqool Sons

Examining Cashflow Against Mohammed Hasan AlNaqool Sons' Earnings

One key financial ratio used to measure how well a company converts its profit to free cash flow (FCF) is the accrual ratio. In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that period. 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 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".

Mohammed Hasan AlNaqool Sons has an accrual ratio of 0.34 for the year to June 2021. Unfortunately, that means its free cash flow was a lot less than its statutory profit, which makes us doubt the utility of profit as a guide. Over the last year it actually had negative free cash flow of ر.س4.5b, in contrast to the aforementioned profit of ر.س9.00b. It's worth noting that Mohammed Hasan AlNaqool Sons generated positive FCF of ر.س199m 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 Mohammed Hasan AlNaqool Sons.

Our Take On Mohammed Hasan AlNaqool Sons' Profit Performance

As we discussed above, we think Mohammed Hasan AlNaqool Sons' earnings were not supported by free cash flow, which might concern some investors. As a result, we think it may well be the case that Mohammed Hasan AlNaqool Sons' underlying earnings power is lower 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. 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. So if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. Our analysis shows 2 warning signs for Mohammed Hasan AlNaqool Sons (1 is potentially serious!) and we strongly recommend you look at these before investing.

This note has only looked at a single factor that sheds light on the nature of Mohammed Hasan AlNaqool Sons' 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. While it might take a little research on your behalf, you may find this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying to be useful.

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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.
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