Ivanhoe Mines (TSE:IVN) Strong Profits May Be Masking Some Underlying Issues

The market shrugged off Ivanhoe Mines Ltd.'s (TSE:IVN) solid earnings report. Our analysis showed that there are some concerning factors in the earnings that investors may be cautious of.

See our latest analysis for Ivanhoe Mines

A Closer Look At Ivanhoe Mines' Earnings

As finance nerds would already know, the accrual ratio from cashflow is a key measure for assessing how well a company's free cash flow (FCF) matches its profit. 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.

Ivanhoe Mines has an accrual ratio of 0.20 for the year to December 2024. Unfortunately, that means its free cash flow fell significantly short of its reported profits. In the last twelve months it actually had negative free cash flow, with an outflow of US$644m despite its profit of US$228.1m, mentioned above. We also note that Ivanhoe Mines' free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of US$644m. Unfortunately for shareholders, the company has also been issuing new shares, diluting their share of future earnings.

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.

In order to understand the potential for per share returns, it is essential to consider how much a company is diluting shareholders. As it happens, Ivanhoe Mines issued 6.6% more new shares over the last year. Therefore, each share now receives a smaller portion of profit. To talk about net income, without noticing earnings per share, is to be distracted by the big numbers while ignoring the smaller numbers that talk to per share value. You can see a chart of Ivanhoe Mines' EPS by clicking here.

How Is Dilution Impacting Ivanhoe Mines' Earnings Per Share (EPS)?

As you can see above, Ivanhoe Mines has been growing its net income over the last few years, with an annualized gain of 313% over three years. In comparison, earnings per share only gained 280% over the same period. Net profit actually dropped by 28% in the last year. But the EPS result was even worse, with the company recording a decline of 34%. And so, you can see quite clearly that dilution is influencing shareholder earnings.

If Ivanhoe Mines' EPS can grow over time then that drastically improves the chances of the share price moving in the same direction. But on the other hand, we'd be far less excited to learn profit (but not EPS) was improving. For that reason, you could say that EPS is more important that net income in the long run, assuming the goal is to assess whether a company's share price might grow.

Our Take On Ivanhoe Mines' Profit Performance

As it turns out, Ivanhoe Mines couldn't match its profit with cashflow and its dilution means that shareholders own less of the company than the did before (unless they bought more shares). For the reasons mentioned above, we think that a perfunctory glance at Ivanhoe Mines' statutory profits might make it look better than it really is on an underlying level. If you want to do dive deeper into Ivanhoe Mines, you'd also look into what risks it is currently facing. Case in point: We've spotted 1 warning sign for Ivanhoe Mines you should be aware of.

Our examination of Ivanhoe Mines 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. 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 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.