Almarai, the food producer listed on the Saudi stock exchange, posted its first annual decline in profits since the third quarter of 2021, despite recording its highest revenue growth in about three years. This highlights that the main challenge is not the company's ability to boost sales, but rather its capacity to convert this growth into profits, margins, and free cash flow.

The company's revenue rose 11% year-on-year to SAR 5.87 billion, driven by volume growth across markets, product categories, and sales channels. However, net profit fell 1.7% to SAR 635.7 million, impacted by higher costs for feed shipping, energy, and distribution.

These results reflect a clear paradox: Almarai is selling more, but it is not retaining the same proportion of profits or free cash.

In the second quarter, free cash flow plummeted to just SAR 42.2 million, compared to SAR 383 million in the same quarter last year, a decline of 89%, due to lower operating cash flow coupled with continued high capital expenditure.

The figures do not indicate an immediate solvency or liquidity crisis, according to available data, but they reveal a growing challenge in the quality of growth—namely, the company's ability to convert sales expansion into free cash, especially as it executes an investment program exceeding SAR 18 billion through 2028, and as financial leverage approaches the level management considers strategically appropriate.

Almarai profits record first quarterly decline since Q2 2021

Revenue growth alone is not enough

Almarai recorded revenue of SAR 5.87 billion in the second quarter, up 11% year-on-year. However, gross profit rose only 6% to SAR 1.82 billion, while operating profit remained nearly flat at SAR 813.6 million.

This gap shows that cost of sales and operating expenses rose faster than revenue growth, squeezing profitability. Gross margin fell to 31.1% from 32.4% a year earlier, operating margin declined to 13.9% from 15.4%, and net profit margin dropped to 10.8% from 12.2%.

In other words, the second quarter was not weak from a demand perspective, but rather from the company's ability to convert additional sales into net profit. This makes reading margins more important than reading revenues alone.

The company attributed the profit decline to higher feed shipping costs in the dairy segment and increased distribution costs linked to energy expenses. On the other hand, revenue continued to be supported by growth in poultry sales related to expansion projects, along with an improved dairy revenue mix.

Cash flows reveal pressure point

The most sensitive aspect of the results appeared in cash flows. Operating cash flow in the second quarter fell to SAR 1.10 billion from SAR 1.46 billion in the same quarter of 2025, a decline of 25%.

At the same time, cash used in investing activities remained high at SAR 1.05 billion, thus reducing free cash flow to just SAR 42.2 million, compared to SAR 383 million a year earlier.

This does not reflect a sharp decline in accounting profitability so much as the combination of margin and cost pressure on operating cash on one hand, and continued high capital expenditure linked to the expansion cycle on the other.

For the first half of 2026, the picture appears less severe, but remains constrained from a free cash perspective. Operating cash flow reached SAR 2.37 billion, against capital expenditure of about SAR 2.16 billion, resulting in free cash flow of SAR 215 million, compared to SAR 217.9 million in the same period last year.

This means that free cash flow did not decline much on a half-year basis, but it remained tight relative to the size of profits, investments, and cash dividends.

Debt under watch

Almarai still enjoys a strong operational base, a large market position, and positive operating cash flows. Therefore, the current figures do not reveal an immediate debt crisis. However, they make the debt level a factor worth closer monitoring, especially as the company enters a heavy capital expenditure cycle.

At the end of 2025, the company's total outstanding financing amounted to approximately SAR 12.5 billion, distributed among murabaha facilities, government financing, and sukuk.

Management also stated that a net debt-to-EBITDA ratio of around 2.5x represents the group's optimal financing structure, while the ratio stood at 2.48x at the end of 2025.

This does not mean the company has exceeded a worrying level, but it indicates that the room for debt expansion is no longer as wide as it was during periods of low leverage. If free cash flow weakness persists, or if the contribution of new projects to profits is delayed, the company may need to balance financing growth, supporting dividends, and managing debt.

Investment temporarily pressures free cash

The decline in free cash flow cannot be separated from Almarai's strategic plan through 2028. The company announced an investment program exceeding SAR 18 billion, including about SAR 7 billion for expansion in the poultry sector, SAR 5 billion to strengthen dairy, juices, and bakery, SAR 4 billion for supply chain development and sales capabilities, in addition to investments in new food sectors and technology.

Management indicates that executing the program requires a period of high capital expenditure. Capital expenditure over the last 12 months was about 20% of revenue, with spending expected to remain elevated during the implementation phase before eventually returning to a normal range of 7% to 8% of revenue.

Accordingly, the decline in free cash flow does not necessarily represent a structural weakness, but may be part of the transitional cost of an expansion cycle. However, the test of the plan will come in the next phase through the ability of the company's new investments to generate operating returns that exceed the cost of capital and restore free cash flow expansion.

Financial Analysis Unit