It might be old fashioned, but we really like to invest in companies that make a profit, each and every year. However, sometimes companies receive a one-off boost (or reduction) to their profit, and it's not always clear whether statutory profits are a good guide, going forward. In this article, we'll look at how useful this year's statutory profit is, when analysing Abdullah Saad Mohammed Abo Moati Stationaries (TADAWUL:4191).
It's good to see that over the last twelve months Abdullah Saad Mohammed Abo Moati Stationaries made a profit of ر.س10.9m on revenue of ر.س256.5m. The chart below shows that both revenue and profit have declined over the last three years.
Of course, it is only sensible to look beyond the statutory profits and question how well those numbers represent the sustainable earnings power of the business. So today we'll look at what Abdullah Saad Mohammed Abo Moati Stationaries' cashflow tells us about the quality of its earnings. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Abdullah Saad Mohammed Abo Moati Stationaries.
A Closer Look At Abdullah Saad Mohammed Abo Moati Stationaries' 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. The ratio shows us how much a company's profit exceeds its FCF.
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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.
Abdullah Saad Mohammed Abo Moati Stationaries has an accrual ratio of -0.15 for the year to September 2020. Therefore, its statutory earnings were very significantly less than its free cashflow. To wit, it produced free cash flow of ر.س55m during the period, dwarfing its reported profit of ر.س10.9m. Abdullah Saad Mohammed Abo Moati Stationaries shareholders are no doubt pleased that free cash flow improved over the last twelve months.
Our Take On Abdullah Saad Mohammed Abo Moati Stationaries' Profit Performance
Abdullah Saad Mohammed Abo Moati Stationaries' accrual ratio is solid, and indicates strong free cash flow, as we discussed, above. Based on this observation, we consider it likely that Abdullah Saad Mohammed Abo Moati Stationaries' statutory profit actually understates its earnings potential! Unfortunately, though, its earnings per share actually fell back over the last year. The goal of this article has been to assess how well we can rely on the statutory earnings to reflect the company's potential, but there is plenty more to consider. If you'd like to know more about Abdullah Saad Mohammed Abo Moati Stationaries as a business, it's important to be aware of any risks it's facing. Case in point: We've spotted 2 warning signs for Abdullah Saad Mohammed Abo Moati Stationaries you should be mindful of and 1 of them can't be ignored.
Today we've zoomed in on a single data point to better understand the nature of Abdullah Saad Mohammed Abo Moati Stationaries' 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 that insiders are buying to be useful.
If you decide to trade Abdullah Saad Mohammed Abo Moati Stationaries, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account. Promoted
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.
*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.