Is There More To The Story Than Al Moammar Information Systems's (TADAWUL:7200) Earnings Growth?

As a general rule, we think profitable companies are less risky than companies that lose money. 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. Today we'll focus on whether this year's statutory profits are a good guide to understanding Al Moammar Information Systems (TADAWUL:7200).

It's good to see that over the last twelve months Al Moammar Information Systems made a profit of ر.س100.7m on revenue of ر.س1.10b. In the chart below, you can see that its profit and revenue have both grown over the last three years.

Check out our latest analysis for Al Moammar Information Systems

Not all profits are equal, and we can learn more about the nature of a company's past profitability by diving deeper into the financial statements. So today we'll look at what Al Moammar Information Systems' 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 Al Moammar Information Systems.

A Closer Look At Al Moammar Information Systems' Earnings

Many investors haven't heard of the accrual ratio from cashflow, but it is actually a useful measure of how well a company's profit is backed up by free cash flow (FCF) during a given period. 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. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

That means a negative accrual ratio is a good thing, because it shows that the company is bringing in more free cash flow than its profit would suggest. 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 September 2020, Al Moammar Information Systems had an accrual ratio of 0.29. Unfortunately, that means its free cash flow was a lot less than its statutory profit, which makes us doubt the utility of profit as a guide. Even though it reported a profit of ر.س100.7m, a look at free cash flow indicates it actually burnt through ر.س75m in the last year. We saw that FCF was ر.س17m a year ago though, so Al Moammar Information Systems has at least been able to generate positive FCF in the past.

Our Take On Al Moammar Information Systems' Profit Performance

Al Moammar Information Systems didn't convert much of its profit to free cash flow in the last year, which some investors may consider rather suboptimal. Because of this, we think that it may be that Al Moammar Information Systems' statutory profits are better than its underlying earnings power. 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 want to do dive deeper into Al Moammar Information Systems, you'd also look into what risks it is currently facing. To help with this, we've discovered 4 warning signs (2 are a bit concerning!) that you ought to be aware of before buying any shares in Al Moammar Information Systems.

This note has only looked at a single factor that sheds light on the nature of Al Moammar Information Systems' profit. But there is always more to discover if you are capable of focussing your mind on minutiae. Some people consider a high return on equity to be a good sign of a quality business. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.

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