Anglo Asian Mining's (LON:AAZ) Strong Earnings Are Of Good Quality

Anglo Asian Mining PLC (LON:AAZ) recently posted some strong earnings, and the market responded positively. We did some digging and found some further encouraging factors that investors will like.

Check out our latest analysis for Anglo Asian Mining

Zooming In On Anglo Asian Mining'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). 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.

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. 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.

Over the twelve months to December 2020, Anglo Asian Mining recorded an accrual ratio of -0.12. Therefore, its statutory earnings were quite a lot less than its free cashflow. In fact, it had free cash flow of US$34m in the last year, which was a lot more than its statutory profit of US$23.2m. Anglo Asian Mining shareholders are no doubt pleased that free cash flow improved over the last twelve months.

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.

Our Take On Anglo Asian Mining's Profit Performance

As we discussed above, Anglo Asian Mining has perfectly satisfactory free cash flow relative to profit. Because of this, we think Anglo Asian Mining's earnings potential is at least as good as it seems, and maybe even better! And on top of that, its earnings per share have grown at an extremely impressive rate over the last three years. 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 while earnings quality is important, it's equally important to consider the risks facing Anglo Asian Mining at this point in time. While conducting our analysis, we found that Anglo Asian Mining has 1 warning sign and it would be unwise to ignore it.

This note has only looked at a single factor that sheds light on the nature of Anglo Asian Mining's profit. But there is always more to discover if you are capable of focussing your mind on minutiae. 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 that insiders are buying to be useful.

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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. 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.
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