Retal Urban Development's (TADAWUL:4322) Performance Is Even Better Than Its Earnings Suggest

Retal Urban Development Company (TADAWUL:4322) just reported healthy earnings but the stock price didn't move much. Our analysis suggests that investors might be missing some promising details.

Check out our latest analysis for Retal Urban Development

Zooming In On Retal Urban Development's 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'.

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. 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. 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 September 2022, Retal Urban Development had an accrual ratio of -0.21. That implies it has very good cash conversion, and that its earnings in the last year actually significantly understate its free cash flow. In fact, it had free cash flow of ر.س397m in the last year, which was a lot more than its statutory profit of ر.س257.0m. Notably, Retal Urban Development had negative free cash flow last year, so the ر.س397m 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 Retal Urban Development.

Our Take On Retal Urban Development's Profit Performance

As we discussed above, Retal Urban Development's accrual ratio indicates strong conversion of profit to free cash flow, which is a positive for the company. Because of this, we think Retal Urban Development's underlying earnings potential is as good as, or possibly even better, than the statutory profit makes it seem! And the EPS is up 47% over 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. If you want to do dive deeper into Retal Urban Development, you'd also look into what risks it is currently facing. In terms of investment risks, we've identified 1 warning sign with Retal Urban Development, and understanding it should be part of your investment process.

This note has only looked at a single factor that sheds light on the nature of Retal Urban Development'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 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.