We Think You Should Be Aware Of Some Concerning Factors In Alkhorayef Water and Power Technologies' (TADAWUL:2081) Earnings

Alkhorayef Water and Power Technologies Company's (TADAWUL:2081 ) stock didn't jump after it announced some healthy earnings. Our analysis showed that there are some concerning factors in the earnings that investors may be cautious of.

See our latest analysis for Alkhorayef Water and Power Technologies

Zooming In On Alkhorayef Water and Power Technologies' Earnings

One key financial ratio used to measure how well a company converts its profit to free cash flow (FCF) is the accrual ratio. In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that period. 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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

Alkhorayef Water and Power Technologies has an accrual ratio of 0.21 for the year to December 2023. Unfortunately, that means its free cash flow fell significantly short of its reported profits. Over the last year it actually had negative free cash flow of ر.س53m, in contrast to the aforementioned profit of ر.س140.0m. Coming off the back of negative free cash flow last year, we imagine some shareholders might wonder if its cash burn of ر.س53m, this year, indicates high risk.

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 Alkhorayef Water and Power Technologies' Profit Performance

Alkhorayef Water and Power Technologies' accrual ratio for the last twelve months signifies cash conversion is less than ideal, which is a negative when it comes to our view of its earnings. Because of this, we think that it may be that Alkhorayef Water and Power Technologies' statutory profits are better than its underlying earnings power. Nonetheless, it's still worth noting that its earnings per share have grown at 23% 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. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. Case in point: We've spotted 4 warning signs for Alkhorayef Water and Power Technologies you should be mindful of and 2 of them are significant.

This note has only looked at a single factor that sheds light on the nature of Alkhorayef Water and Power Technologies' 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. 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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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.