Al-Saif Stores for Development & Investment's (TADAWUL:4192) Soft Earnings Are Actually Better Than They Appear

The subdued market reaction suggests that Al-Saif Stores for Development & Investment Company's (TADAWUL:4192) recent earnings didn't contain any surprises. We think that investors are worried about some weaknesses underlying the earnings.

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Zooming In On Al-Saif Stores for Development & Investment's Earnings

In high finance, the key ratio used to measure how well a company converts reported profits into free cash flow (FCF) is the accrual ratio (from cashflow). 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 it's not a problem to have a positive accrual ratio, indicating a certain level of non-cash profits, a high accrual ratio is arguably a bad thing, because it indicates paper profits are not matched by cash flow. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

Over the twelve months to December 2024, Al-Saif Stores for Development & Investment recorded an accrual ratio of -0.25. That implies it has very good cash conversion, and that its earnings in the last year actually significantly understate its free cash flow. Indeed, in the last twelve months it reported free cash flow of ر.س169m, well over the ر.س37.5m it reported in profit. Given that Al-Saif Stores for Development & Investment had negative free cash flow in the prior corresponding period, the trailing twelve month resul of ر.س169m would seem to be a step in the right direction. Having said that, there is more to the story. We can see that unusual items have impacted its statutory profit, and therefore the accrual ratio.

See our latest analysis for Al-Saif Stores for Development & Investment

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.

The Impact Of Unusual Items On Profit

Surprisingly, given Al-Saif Stores for Development & Investment's accrual ratio implied strong cash conversion, its paper profit was actually boosted by ر.س43m in unusual items. We can't deny that higher profits generally leave us optimistic, but we'd prefer it if the profit were to be sustainable. We ran the numbers on most publicly listed companies worldwide, and it's very common for unusual items to be once-off in nature. And, after all, that's exactly what the accounting terminology implies. Al-Saif Stores for Development & Investment had a rather significant contribution from unusual items relative to its profit to December 2024. As a result, we can surmise that the unusual items are making its statutory profit significantly stronger than it would otherwise be.

Our Take On Al-Saif Stores for Development & Investment's Profit Performance

Al-Saif Stores for Development & Investment's profits got a boost from unusual items, which indicates they might not be sustained and yet its accrual ratio still indicated solid cash conversion, which is promising. Based on these factors, it's hard to tell if Al-Saif Stores for Development & Investment's profits are a reasonable reflection of its underlying profitability. If you want to do dive deeper into Al-Saif Stores for Development & Investment, you'd also look into what risks it is currently facing. In terms of investment risks, we've identified 2 warning signs with Al-Saif Stores for Development & Investment, and understanding these should be part of your investment process.

In this article we've looked at a number of factors that can impair the utility of profit numbers, as a guide to a business. 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.