Aldrees Petroleum and Transport Services' (TADAWUL:4200) Profits May Not Reveal Underlying Issues

The recent earnings posted by Aldrees Petroleum and Transport Services Company (TADAWUL:4200) were solid, but the stock didn't move as much as we expected. We believe that shareholders have noticed some concerning factors beyond the statutory profit numbers.

See our latest analysis for Aldrees Petroleum and Transport Services

Zooming In On Aldrees Petroleum and Transport 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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

Aldrees Petroleum and Transport Services has an accrual ratio of 0.93 for the year to June 2024. Statistically speaking, that's a real negative for future earnings. To wit, the company did not generate one whit of free cashflow in that time. Even though it reported a profit of ر.س299.9m, a look at free cash flow indicates it actually burnt through ر.س608m in the last year. We saw that FCF was ر.س1.4b a year ago though, so Aldrees Petroleum and Transport Services has at least been able to generate positive FCF in the past. One positive for Aldrees Petroleum and Transport Services shareholders is that it's accrual ratio was significantly better last year, providing reason to believe that it may return to stronger cash conversion in the future. As a result, some shareholders may be looking for stronger cash conversion in the current year.

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 Aldrees Petroleum and Transport Services' Profit Performance

As we discussed above, we think Aldrees Petroleum and Transport Services' earnings were not supported by free cash flow, which might concern some investors. For this reason, we think that Aldrees Petroleum and Transport Services' statutory profits may be a bad guide to its underlying earnings power, and might give investors an overly positive impression of the company. But on the bright side, its earnings per share have grown at an extremely impressive rate over the last three years. 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'd like to know more about Aldrees Petroleum and Transport Services as a business, it's important to be aware of any risks it's facing. At Simply Wall St, we found 1 warning sign for Aldrees Petroleum and Transport Services and we think they deserve your attention.

This note has only looked at a single factor that sheds light on the nature of Aldrees Petroleum and Transport 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 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com