Many investors consider it preferable to invest in profitable companies over unprofitable ones, because profitability suggests a business is sustainable. However, sometimes companies receive a one-off boost (or reduction) to their profit, and it’s not always clear whether statutory profits are a good guide, going forward. In this article, we’ll look at how useful this year’s statutory profit is, when analysing Maya Gold and Silver (TSE:MYA).
While Maya Gold and Silver was able to generate revenue of US$4.09m in the last twelve months, we think its profit result of US$1.83m was more important. The chart below shows that while revenue is flat over the last three years, the company has moved from unprofitable to profitable.
Of course, it is only sensible to look beyond the statutory profits and question how well those numbers represent the sustainable earnings power of the business. So this article aims to better understand Maya Gold and Silver’s underlying earnings power by taking a look at how dilution, and unusual items are impacting it, and considering how well those paper profits are being converted into cash flow. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Maya Gold and Silver.
A Closer Look At Maya Gold and Silver’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). In plain english, this ratio subtracts FCF from net profit, and divides that number by the company’s average operating assets over that period. This ratio tells us how much of a company’s profit is not backed by free cashflow.
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. 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.
Over the twelve months to September 2019, Maya Gold and Silver recorded an accrual ratio of 0.34. Unfortunately, that means its free cash flow was a lot less than its statutory profit, which makes us doubt the utility of profit as a guide. In the last twelve months it actually had negative free cash flow, with an outflow of US$5.9m despite its profit of US$1.83m, mentioned above. Coming off the back of negative free cash flow last year, we imagine some shareholders might wonder if its cash burn of US$5.9m, this year, indicates high risk.
However, that’s not the end of the story. We can look at how unusual items in the profit and loss statement impacted its accrual ratio, as well as explore how dilution is impacting shareholders negatively. Notably, the company has issued new shares, thus diluting existing shareholders and reducing their share of future earnings.
In order to understand the potential for per share returns, it is essential to consider how much a company is diluting shareholders. Maya Gold and Silver expanded the number of shares on issue by 18% over the last year. As a result, its net income is now split between a greater number of shares. To celebrate net income while ignoring dilution is like rejoicing because you have a single slice of a larger pizza, but ignoring the fact that the pizza is now cut into many more slices. You can see a chart of Maya Gold and Silver’s EPS by clicking here.
How Is Dilution Impacting Maya Gold and Silver’s Earnings Per Share? (EPS)
Maya Gold and Silver was losing money three years ago. And even focusing only on the last twelve months, we don’t have a meaningful growth rate because it made a loss a year ago, too. What we do know is that while it’s great to see a profit over the last twelve months, that profit would have been better, on a per share basis, if the company hadn’t needed to issue shares. So you can see that the dilution has had a bit of an impact on shareholders.Therefore, the dilution is having a noteworthy influence on shareholder returnsAnd so, you can see quite clearly that dilution is influencing shareholder earnings.
In the long term, if Maya Gold and Silver’s earnings per share can increase, then the share price should too. However, if its profit increases while its earnings per share stay flat (or even fall) then shareholders might not see much benefit. For the ordinary retail shareholder, EPS is a great measure to check your hypothetical “share” of the company’s profit.
The Impact Of Unusual Items On Profit
Unfortunately (in the short term) Maya Gold and Silver saw its profit reduced by unusual items worth US$512k. If this was a non-cash charge, it would have made the accrual ratio better, if cashflow had stayed strong, so it’s not great to see in combination with an uninspiring accrual ratio. While deductions due to unusual items are disappointing in the first instance, there is a silver lining. We looked at thousands of listed companies and found that unusual items are very often one-off in nature. And that’s hardly a surprise given these line items are considered unusual. Maya Gold and Silver took a rather significant hit from unusual items in the year to September 2019. As a result, we can surmise that the unusual items made its statutory profit significantly weaker than it would otherwise be.
Our Take On Maya Gold and Silver’s Profit Performance
In conclusion, Maya Gold and Silver’s accrual ratio suggests that its statutory earnings are not backed by cash flow; but the fact unusual items actually weighed on profit may create upside if those unusual items to not recur. On top of that, the dilution means that shareholders now own less of the company. Based on these factors, we think that Maya Gold and Silver’s statutory profits probably make it seem better than it is on an underlying level. Just as investors must consider earnings, it is also important to take into account the strength of a company’s balance sheet. If you want to,you can see our take on Maya Gold and Silver’s balance sheet by clicking here.
Our examination of Maya Gold and Silver has focussed on certain factors that can make its earnings look better than they are. And, on that basis, we are somewhat skeptical. But there is always more to discover if you are capable of focussing your mind on minutiae. 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.
If you spot an error that warrants correction, please contact the editor at email@example.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.