Statutory Earnings May Not Be The Best Way To Understand Globex Mining Enterprises' (TSE:GMX) True Position

Even though Globex Mining Enterprises Inc. (TSE:GMX) posted strong earnings recently, the stock hasn't reacted in a large way. We looked deeper into the numbers and found that shareholders might be concerned with some underlying weaknesses.

Check out our latest analysis for Globex Mining Enterprises

Examining Cashflow Against Globex Mining Enterprises' 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. 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.

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

For the year to September 2024, Globex Mining Enterprises had an accrual ratio of 0.27. Unfortunately, that means its free cash flow fell significantly short of its reported profits. To wit, it produced free cash flow of CA$3.0m during the period, falling well short of its reported profit of CA$4.60m. We note, however, that Globex Mining Enterprises grew its free cash flow over the last year. 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. One positive for Globex Mining Enterprises shareholders is that it's accrual ratio was significantly better last year, providing reason to believe that it may return to stronger cash conversion in the future. Shareholders should look for improved cashflow relative to profit in the current year, if that is indeed the case.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Globex Mining Enterprises.

The Impact Of Unusual Items On Profit

Given the accrual ratio, it's not overly surprising that Globex Mining Enterprises' profit was boosted by unusual items worth CA$1.1m in the last twelve months. While it's always nice to have higher profit, a large contribution from unusual items sometimes dampens our enthusiasm. We ran the numbers on most publicly listed companies worldwide, and it's very common for unusual items to be once-off in nature. And, after all, that's exactly what the accounting terminology implies. Globex Mining Enterprises had a rather significant contribution from unusual items relative to its profit to September 2024. As a result, we can surmise that the unusual items are making its statutory profit significantly stronger than it would otherwise be.

Our Take On Globex Mining Enterprises' Profit Performance

Summing up, Globex Mining Enterprises received a nice boost to profit from unusual items, but could not match its paper profit with free cash flow. For the reasons mentioned above, we think that a perfunctory glance at Globex Mining Enterprises' statutory profits might make it look better than it really is on an underlying level. If you'd like to know more about Globex Mining Enterprises as a business, it's important to be aware of any risks it's facing. When we did our research, we found 4 warning signs for Globex Mining Enterprises (1 is potentially serious!) that we believe deserve your full attention.

Our examination of Globex Mining Enterprises 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 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. While it might take a little research on your behalf, you may find this free collection of companies boasting high return on equity, or this list of stocks with significant insider holdings to be useful.

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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.