Siberian Mining Group's (HKG:1142) Earnings Are Of Questionable Quality

Despite posting some strong earnings, the market for Siberian Mining Group Company Limited's (HKG:1142) stock hasn't moved much. Our analysis suggests that shareholders have noticed something concerning in the numbers.

View our latest analysis for Siberian Mining Group

Examining Cashflow Against Siberian Mining Group's Earnings

One key financial ratio used to measure how well a company converts its profit to free cash flow (FCF) is the accrual ratio. To get the accrual ratio we first subtract FCF from profit for a period, and then divide that number by the average operating assets for the period. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

That means a negative accrual ratio is a good thing, because it shows that the company is bringing in more free cash flow than its profit would suggest. 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.

For the year to March 2021, Siberian Mining Group had an accrual ratio of 0.35. Therefore, we know that it's free cashflow was significantly lower than its statutory profit, raising questions about how useful that profit figure really is. Even though it reported a profit of HK$524.6m, a look at free cash flow indicates it actually burnt through HK$13m in the last year. We also note that Siberian Mining Group's free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of HK$13m. One positive for Siberian Mining Group 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. As a result, some shareholders may be looking for stronger cash conversion in the current year.

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

Our Take On Siberian Mining Group's Profit Performance

As we have made quite clear, we're a bit worried that Siberian Mining Group didn't back up the last year's profit with free cashflow. For this reason, we think that Siberian Mining Group's statutory profits may be a bad guide to its underlying earnings power, and might give investors an overly positive impression of the company. The good news is that it earned a profit in the last twelve months, despite its previous loss. The goal of this article has been to assess how well we can rely on the statutory earnings to reflect the company's potential, but there is plenty more to consider. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. To that end, you should learn about the 5 warning signs we've spotted with Siberian Mining Group (including 3 which can't be ignored).

This note has only looked at a single factor that sheds light on the nature of Siberian Mining Group's 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. 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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