Are Auriant Mining's (STO:AUR) Statutory Earnings A Good Guide To Its Underlying Profitability?

It might be old fashioned, but we really like to invest in companies that make a profit, each and every year. However, sometimes companies receive a one-off boost (or reduction) to their profit, and it's not always clear whether statutory profits are a good guide, going forward. Today we'll focus on whether this year's statutory profits are a good guide to understanding Auriant Mining (STO:AUR).

We like the fact that Auriant Mining made a profit of kr103.5m on its revenue of kr483.7m, in the last year.

Check out our latest analysis for Auriant Mining

Of course, it is only sensible to look beyond the statutory profits and question how well those numbers represent the sustainable earnings power of the business. Today, we'll discuss Auriant Mining's free cashflow relative to its earnings, and consider what that tells us about the company. 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.

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

Over the twelve months to September 2020, Auriant Mining recorded an accrual ratio of -0.19. Therefore, its statutory earnings were very significantly less than its free cashflow. To wit, it produced free cash flow of kr193m during the period, dwarfing its reported profit of kr103.5m. Given that Auriant Mining had negative free cash flow in the prior corresponding period, the trailing twelve month resul of kr193m would seem to be a step in the right direction.

Our Take On Auriant Mining's Profit Performance

Happily for shareholders, Auriant Mining produced plenty of free cash flow to back up its statutory profit numbers. Based on this observation, we consider it possible that Auriant Mining's statutory profit actually understates its earnings potential! And one can definitely find a positive in the fact that it made a profit this year, despite losing money last year. At the end of the day, it's essential to consider more than just the factors above, if you want to understand the company properly. If you'd like to know more about Auriant Mining as a business, it's important to be aware of any risks it's facing. At Simply Wall St, we found 2 warning signs for Auriant Mining and we think they deserve your attention.

Today we've zoomed in on a single data point to better understand the nature of Auriant Mining'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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