We Think You Can Look Beyond Shanxi Coking Coal Energy Group's (SZSE:000983) Lackluster Earnings

The market for Shanxi Coking Coal Energy Group Co., Ltd.'s (SZSE:000983) shares didn't move much after it posted weak earnings recently. Our analysis suggests that while the profits are soft, the foundations of the business are strong.

Check out our latest analysis for Shanxi Coking Coal Energy Group

Zooming In On Shanxi Coking Coal Energy Group's 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. 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. This ratio tells us how much of a company's profit is not backed by free cashflow.

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 December 2023, Shanxi Coking Coal Energy Group had an accrual ratio of -0.13. That indicates that its free cash flow was a fair bit more than its statutory profit. Indeed, in the last twelve months it reported free cash flow of CN¥12b, well over the CN¥6.77b it reported in profit. Shanxi Coking Coal Energy Group's free cash flow actually declined over the last year, which is disappointing, like non-biodegradable balloons. Notably, the company has issued new shares, thus diluting existing shareholders and reducing 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.

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. In fact, Shanxi Coking Coal Energy Group increased the number of shares on issue by 9.1% over the last twelve months by issuing new shares. As a result, its net income is now split between a greater number of shares. Per share metrics like EPS help us understand how much actual shareholders are benefitting from the company's profits, while the net income level gives us a better view of the company's absolute size. You can see a chart of Shanxi Coking Coal Energy Group's EPS by clicking here.

A Look At The Impact Of Shanxi Coking Coal Energy Group's Dilution On Its Earnings Per Share (EPS)

Shanxi Coking Coal Energy Group has improved its profit over the last three years, with an annualized gain of 246% in that time. In comparison, earnings per share only gained 157% over the same period. Net income was down 37% over the last twelve months. Unfortunately for shareholders, though, the earnings per share result was even worse, declining 41%. So you can see that the dilution has had a bit of an impact on shareholders.

If Shanxi Coking Coal Energy Group's EPS can grow over time then that drastically improves the chances of the share price moving in the same direction. 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.

Our Take On Shanxi Coking Coal Energy Group's Profit Performance

In conclusion, Shanxi Coking Coal Energy Group has a strong cashflow relative to earnings, which indicates good quality earnings, but the dilution means its earnings per share are dropping faster than its profit. Based on these factors, it's hard to tell if Shanxi Coking Coal Energy Group's profits are a reasonable reflection of its underlying profitability. So if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. In terms of investment risks, we've identified 2 warning signs with Shanxi Coking Coal Energy Group, and understanding these bad boys should be part of your investment process.

Our examination of Shanxi Coking Coal Energy Group has focussed on certain factors that can make its earnings look better than they are. 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 that insiders are buying.

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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.