Abu Dhabi Ports Company PJSC’s (ADX:ADPORTS) Promising Earnings May Rest On Soft Foundations

Abu Dhabi Ports Company PJSC’s (ADX:ADPORTS) robust earnings report didn’t manage to move the market for its stock. Our analysis suggests that shareholders have noticed something concerning in the numbers.

View our latest analysis for Abu Dhabi Ports Company PJSC

A Closer Look At Abu Dhabi Ports Company PJSC’s Earnings

One key financial ratio used to measure how well a company converts its profit to free cash flow (FCF) is the accrual ratio. 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.

Over the twelve months to June 2022, Abu Dhabi Ports Company PJSC recorded an accrual ratio of 0.24. Unfortunately, that means its free cash flow fell significantly short of its reported profits. Even though it reported a profit of د.إ1.05b, a look at free cash flow indicates it actually burnt through د.إ3.5b in the last year. We also note that Abu Dhabi Ports Company PJSC’s free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of د.إ3.5b. However, that’s not all there is to consider. The accrual ratio is reflecting the impact of unusual items on statutory profit, at least in part.

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.

The Impact Of Unusual Items On Profit

As it happens, there are a few different things to consider when we look at Abu Dhabi Ports Company PJSC’s profit and the last one we’ll mention is د.إ90m gain booked as unusual items. While we like to see profit increases, we tend to be a little more cautious when unusual items have made a big contribution. We ran the numbers on most publicly listed companies worldwide, and it’s very common for unusual items to be once-off in nature. Which is hardly surprising, given the name. If Abu Dhabi Ports Company PJSC 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 Abu Dhabi Ports Company PJSC’s Profit Performance

Abu Dhabi Ports Company PJSC had a weak accrual ratio, but its profit did receive a boost from unusual items. For the reasons mentioned above, we think that a perfunctory glance at Abu Dhabi Ports Company PJSC’s statutory profits might make it look better than it really is on an underlying level. In light of this, if you’d like to do more analysis on the company, it’s vital to be informed of the risks involved. At Simply Wall St, we found 1 warning sign for Abu Dhabi Ports Company PJSC and we think they deserve your attention.

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 are plenty of other ways to inform your opinion of a company. 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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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.