We Think You Can Look Beyond Saudi Automotive Services' (TADAWUL:4050) Lackluster Earnings

Soft earnings didn't appear to concern Saudi Automotive Services Company's (TADAWUL:4050) shareholders over the last week. We think that the softer headline numbers might be getting counterbalanced by some positive underlying factors.

See our latest analysis for Saudi Automotive Services

A Closer Look At Saudi Automotive Services' 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. 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. This ratio tells us how much of a company's profit is not backed by free cashflow.

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. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

For the year to March 2021, Saudi Automotive Services had an accrual ratio of -0.15. 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.س248m in the last year, which was a lot more than its statutory profit of ر.س44.0m. Notably, Saudi Automotive Services had negative free cash flow last year, so the ر.س248m it produced this year was a welcome improvement.

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 Saudi Automotive Services' Profit Performance

As we discussed above, Saudi Automotive Services has perfectly satisfactory free cash flow relative to profit. Because of this, we think Saudi Automotive Services' earnings potential is at least as good as it seems, and maybe even better! And on top of that, its earnings per share have grown at 42% per year 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. If you'd like to know more about Saudi Automotive Services as a business, it's important to be aware of any risks it's facing. Every company has risks, and we've spotted 3 warning signs for Saudi Automotive Services (of which 1 shouldn't be ignored!) you should know about.

This note has only looked at a single factor that sheds light on the nature of Saudi Automotive Services' 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. 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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