We Think That There Are Issues Underlying Magnitogorsk Iron & Steel Works' (MCX:MAGN) Earnings

Despite posting some strong earnings, the market for Public Joint Stock Company Magnitogorsk Iron & Steel Works' (MCX:MAGN) stock hasn't moved much. We did some digging, and we found some concerning factors in the details.

See our latest analysis for Magnitogorsk Iron & Steel Works

Examining Cashflow Against Magnitogorsk Iron & Steel Works' 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. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

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. To quote a 2014 paper by Lewellen and Resutek, "firms with higher accruals tend to be less profitable in the future".

For the year to September 2021, Magnitogorsk Iron & Steel Works had an accrual ratio of 0.28. Unfortunately, that means its free cash flow fell significantly short of its reported profits. In fact, it had free cash flow of US$1.2b in the last year, which was a lot less than its statutory profit of US$2.64b. We note, however, that Magnitogorsk Iron & Steel Works grew its free cash flow over the last year. One positive for Magnitogorsk Iron & Steel Works 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.

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 Magnitogorsk Iron & Steel Works' Profit Performance

Magnitogorsk Iron & Steel Works' accrual ratio for the last twelve months signifies cash conversion is less than ideal, which is a negative when it comes to our view of its earnings. Therefore, it seems possible to us that Magnitogorsk Iron & Steel Works' true underlying earnings power is actually less than its statutory profit. But the good news is that its EPS growth over the last three years has been very impressive. 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 if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. Case in point: We've spotted 4 warning signs for Magnitogorsk Iron & Steel Works you should be mindful of and 2 of them shouldn't be ignored.

Today we've zoomed in on a single data point to better understand the nature of Magnitogorsk Iron & Steel Works' 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.

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.

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