Lumi Rental's (TADAWUL:4262) Shareholders May Want To Dig Deeper Than Statutory Profit

The market shrugged off Lumi Rental Company's (TADAWUL:4262) solid earnings report. We think that investors might be worried about some concerning underlying factors.

See our latest analysis for Lumi Rental

A Closer Look At Lumi Rental'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.

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. 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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

Lumi Rental has an accrual ratio of 0.54 for the year to December 2023. 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. In the last twelve months it actually had negative free cash flow, with an outflow of ر.س819m despite its profit of ر.س160.6m, mentioned above. We also note that Lumi Rental's free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of ر.س819m.

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 Lumi Rental's Profit Performance

As we have made quite clear, we're a bit worried that Lumi Rental didn't back up the last year's profit with free cashflow. As a result, we think it may well be the case that Lumi Rental's underlying earnings power is lower than its statutory profit. The good news is that, its earnings per share increased by 12% in the last year. At the end of the day, it's essential to consider more than just the factors above, if you want to understand the company properly. So while earnings quality is important, it's equally important to consider the risks facing Lumi Rental at this point in time. In terms of investment risks, we've identified 2 warning signs with Lumi Rental, and understanding them should be part of your investment process.

This note has only looked at a single factor that sheds light on the nature of Lumi Rental's 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. 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 that insiders are buying 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.