Statutory Profit Doesn't Reflect How Good Saudi Azm for Communication and Information Technology's (TADAWUL:7211) Earnings Are

Saudi Azm for Communication and Information Technology Company (TADAWUL:7211) recently posted some strong earnings, and the market responded positively. We have done some analysis, and we found several positive factors beyond the profit numbers.

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Zooming In On Saudi Azm for Communication and Information Technology'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. The ratio shows us how much a company's profit exceeds its FCF.

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. That is not intended to imply we should worry about a positive accrual ratio, but it's worth noting where the accrual ratio is rather high. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

Saudi Azm for Communication and Information Technology has an accrual ratio of -1.63 for the year to June 2025. That indicates that its free cash flow quite significantly exceeded its statutory profit. In fact, it had free cash flow of ر.س97m in the last year, which was a lot more than its statutory profit of ر.س37.4m. Given that Saudi Azm for Communication and Information Technology had negative free cash flow in the prior corresponding period, the trailing twelve month resul of ر.س97m 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 Saudi Azm for Communication and Information Technology

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Saudi Azm for Communication and Information Technology.

How Do Unusual Items Influence Profit?

While the accrual ratio might bode well, we also note that Saudi Azm for Communication and Information Technology's profit was boosted by unusual items worth ر.س5.0m in the last twelve months. While we like to see profit increases, we tend to be a little more cautious when unusual items have made a big contribution. 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. And, after all, that's exactly what the accounting terminology implies. Assuming those unusual items don't show up again in the current year, we'd thus expect profit to be weaker next year (in the absence of business growth, that is).

Our Take On Saudi Azm for Communication and Information Technology's Profit Performance

Saudi Azm for Communication and Information Technology'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, we think that Saudi Azm for Communication and Information Technology's profits are a reasonably conservative guide to its underlying profitability. While we do think that it has a good earnings profile, that doesn't mean the company is cheap. Given that Saudi Azm for Communication and Information Technology has managed to grow its earnings, it may well have an above average P/E ratio.Click here to find out!

Our examination of Saudi Azm for Communication and Information Technology has focussed on certain factors that can make its earnings look better than they are. But there is always more to discover if you are capable of focussing your mind on minutiae. 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. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks with high insider ownership.

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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.