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.

Our free stock report includes 3 warning signs investors should be aware of before investing in Saudi Automotive Services. Read for free now.

Zooming In On 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. The accrual ratio subtracts the FCF from the profit for a given period, and divides the result by the average operating assets of the company over that time. This ratio tells us how much of a company's profit is not backed by free cashflow.

Therefore, it's actually considered a good thing when a company has a negative accrual ratio, but a bad thing if its accrual ratio is positive. 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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

Saudi Automotive Services has an accrual ratio of -0.24 for the year to March 2025. That indicates that its free cash flow quite significantly exceeded its statutory profit. In fact, it had free cash flow of ر.س612m in the last year, which was a lot more than its statutory profit of ر.س37.9m. Saudi Automotive Services shareholders are no doubt pleased that free cash flow improved over the last twelve months.

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

Happily for shareholders, Saudi Automotive Services produced plenty of free cash flow to back up its statutory profit numbers. Because of this, we think Saudi Automotive Services' underlying earnings potential is as good as, or possibly even better, than the statutory profit makes it seem! Unfortunately, though, its earnings per share actually fell back over the last year. 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 Saudi Automotive Services, you'd also look into what risks it is currently facing. For example, we've found that Saudi Automotive Services has 3 warning signs (1 is 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 Saudi Automotive Services' profit. But there are plenty of other ways to inform your opinion of a company. Some people consider a high return on equity to be a good sign of a quality business. 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 with significant insider holdings 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.