Union Properties' (DFM:UPP) Earnings Quality Is Low

Shareholders didn't appear too concerned by Union Properties Public Joint Stock Company's (DFM:UPP) weak earnings. We did some digging, and we believe that investors are missing some worrying factors underlying the profit figures.

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Examining Cashflow Against Union Properties' 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. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

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. 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.

Union Properties has an accrual ratio of 0.21 for the year to September 2026. Unfortunately, that means its free cash flow fell significantly short of its reported profits. Even though it reported a profit of د.إ351.3m, a look at free cash flow indicates it actually burnt through د.إ344m in the last year. It's worth noting that Union Properties generated positive FCF of د.إ250m a year ago, so at least they've done it in the past. Having said that, there is more to the story. The accrual ratio is reflecting the impact of unusual items on statutory profit, at least in part.

See our latest analysis for Union Properties

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.

How Do Unusual Items Influence Profit?

Given the accrual ratio, it's not overly surprising that Union Properties' profit was boosted by unusual items worth د.إ415m in the last twelve months. While it's always nice to have higher profit, a large contribution from unusual items sometimes dampens our enthusiasm. 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. Union Properties had a rather significant contribution from unusual items relative to its profit to September 2026. All else being equal, this would likely have the effect of making the statutory profit a poor guide to underlying earnings power.

Our Take On Union Properties' Profit Performance

Union Properties 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 Union Properties' statutory profits might make it look better than it really is on an underlying level. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. To help with this, we've discovered 4 warning signs (1 is a bit unpleasant!) that you ought to be aware of before buying any shares in Union Properties.

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 with high insider ownership.

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