Investors Can Find Comfort In Kinetic Mines and Energy's (HKG:1277) Earnings Quality

Shareholders appeared unconcerned with Kinetic Mines and Energy Limited's (HKG:1277) lackluster earnings report last week. We did some digging, and we believe the earnings are stronger than they seem.

Check out our latest analysis for Kinetic Mines and Energy

Examining Cashflow Against Kinetic Mines and Energy's 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. 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. 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. 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. That's because some academic studies have suggested that high accruals ratios tend to lead to lower profit or less profit growth.

Kinetic Mines and Energy has an accrual ratio of -0.16 for the year to December 2020. That implies it has very good cash conversion, and that its earnings in the last year actually significantly understate its free cash flow. Indeed, in the last twelve months it reported free cash flow of CN¥1.1b, well over the CN¥814.8m it reported in profit. Kinetic Mines and Energy 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 Kinetic Mines and Energy's Profit Performance

As we discussed above, Kinetic Mines and Energy has perfectly satisfactory free cash flow relative to profit. Because of this, we think Kinetic Mines and Energy's earnings potential is at least as good as it seems, and maybe even better! And the EPS is up 51% annually, over the last three years. 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. If you want to do dive deeper into Kinetic Mines and Energy, you'd also look into what risks it is currently facing. In terms of investment risks, we've identified 1 warning sign with Kinetic Mines and Energy, and understanding it should be part of your investment process.

This note has only looked at a single factor that sheds light on the nature of Kinetic Mines and Energy's profit. 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. 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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