Additional Considerations Required While Assessing Matachewan Consolidated Mines' (CVE:MCM.A) Strong Earnings

Matachewan Consolidated Mines, Limited (CVE:MCM.A) announced strong profits, but the stock was stagnant. Our analysis suggests that shareholders have noticed something concerning in the numbers.

Check out our latest analysis for Matachewan Consolidated Mines

Zooming In On Matachewan Consolidated Mines' Earnings

Many investors haven't heard of the accrual ratio from cashflow, but it is actually a useful measure of how well a company's profit is backed up by free cash flow (FCF) during a given period. 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.

As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. 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. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

Matachewan Consolidated Mines has an accrual ratio of 2.45 for the year to September 2024. As a general rule, that bodes poorly for future profitability. To wit, the company did not generate one whit of free cashflow in that time. Over the last year it actually had negative free cash flow of CA$148k, in contrast to the aforementioned profit of CA$2.25m. We also note that Matachewan Consolidated Mines' free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of CA$148k.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Matachewan Consolidated Mines.

Our Take On Matachewan Consolidated Mines' Profit Performance

As we discussed above, we think Matachewan Consolidated Mines' earnings were not supported by free cash flow, which might concern some investors. For this reason, we think that Matachewan Consolidated Mines' statutory profits may be a bad guide to its underlying earnings power, and might give investors an overly positive impression of the company. But the happy news is that, while acknowledging we have to look beyond the statutory numbers, those numbers are still improving, with EPS growing at a very high rate over the last year. 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. So if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. Every company has risks, and we've spotted 4 warning signs for Matachewan Consolidated Mines (of which 3 make us uncomfortable!) you should know about.

This note has only looked at a single factor that sheds light on the nature of Matachewan Consolidated Mines' profit. 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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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.