Perfect Presentation for Commercial Services' (TADAWUL:7204) Earnings Are Built On Soft Foundations

Shareholders didn't seem to be thrilled with Perfect Presentation for Commercial Services Company's (TADAWUL:7204) recent earnings report, despite healthy profit numbers. Our analysis has found some concerning factors which weaken the profit's foundation.

See our latest analysis for Perfect Presentation for Commercial Services

Zooming In On Perfect Presentation for Commercial 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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

For the year to September 2024, Perfect Presentation for Commercial Services had an accrual ratio of 0.40. Statistically speaking, that's a real negative for future earnings. And indeed, during the period the company didn't produce any free cash flow whatsoever. Even though it reported a profit of ر.س158.8m, a look at free cash flow indicates it actually burnt through ر.س156m in the last year. Coming off the back of negative free cash flow last year, we imagine some shareholders might wonder if its cash burn of ر.س156m, this year, indicates high risk. However, that's not all there is to consider. We can see that unusual items have impacted its statutory profit, and therefore the accrual ratio.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Perfect Presentation for Commercial Services.

How Do Unusual Items Influence Profit?

Given the accrual ratio, it's not overly surprising that Perfect Presentation for Commercial Services' profit was boosted by unusual items worth ر.س32m in the last twelve months. We can't deny that higher profits generally leave us optimistic, but we'd prefer it if the profit were to be sustainable. When we crunched the numbers on thousands of publicly listed companies, we found that a boost from unusual items in a given year is often not repeated the next year. Which is hardly surprising, given the name. If Perfect Presentation for Commercial Services doesn't see that contribution repeat, then all else being equal we'd expect its profit to drop over the current year.

Our Take On Perfect Presentation for Commercial Services' Profit Performance

Summing up, Perfect Presentation for Commercial Services received a nice boost to profit from unusual items, but could not match its paper profit with free cash flow. Considering all this we'd argue Perfect Presentation for Commercial Services' profits probably give an overly generous impression of its sustainable level of profitability. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. For example - Perfect Presentation for Commercial Services has 2 warning signs we think you should be aware of.

In this article we've looked at a number of factors that can impair the utility of profit numbers, and we've come away cautious. 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. 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.