Aqaseem Factory for Chemicals and Plastics' (TADAWUL:9539) Weak Earnings May Only Reveal A Part Of The Whole Picture

The subdued market reaction suggests that Aqaseem Factory for Chemicals and Plastics Co.'s (TADAWUL:9539) recent earnings didn't contain any surprises. We think that investors are worried about some weaknesses underlying the earnings.

See our latest analysis for Aqaseem Factory for Chemicals and Plastics

A Closer Look At Aqaseem Factory for Chemicals and Plastics' Earnings

As finance nerds would already know, the accrual ratio from cashflow is a key measure for assessing how well a company's free cash flow (FCF) matches its profit. 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. That is not intended to imply we should worry about a positive accrual ratio, but it's worth noting where the accrual ratio is rather high. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

Over the twelve months to June 2024, Aqaseem Factory for Chemicals and Plastics recorded an accrual ratio of 0.20. We can therefore deduce that its free cash flow fell well short of covering its statutory profit. Over the last year it actually had negative free cash flow of ر.س6.9m, in contrast to the aforementioned profit of ر.س9.37m. Coming off the back of negative free cash flow last year, we imagine some shareholders might wonder if its cash burn of ر.س6.9m, this year, indicates high risk.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Aqaseem Factory for Chemicals and Plastics.

Our Take On Aqaseem Factory for Chemicals and Plastics' Profit Performance

Aqaseem Factory for Chemicals and Plastics didn't convert much of its profit to free cash flow in the last year, which some investors may consider rather suboptimal. Because of this, we think that it may be that Aqaseem Factory for Chemicals and Plastics' statutory profits are better than its underlying earnings power. Sadly, its EPS was down over the last twelve months. 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 Aqaseem Factory for Chemicals and Plastics, you'd also look into what risks it is currently facing. For example, we've found that Aqaseem Factory for Chemicals and Plastics has 4 warning signs (1 is a bit concerning!) that deserve your attention before going any further with your analysis.

This note has only looked at a single factor that sheds light on the nature of Aqaseem Factory for Chemicals and Plastics' 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.