MingZhu Logistics Holdings (NASDAQ:YGMZ) Is Posting Solid Earnings, But It Is Not All Good News

The healthy profit announcement from MingZhu Logistics Holdings Limited (NASDAQ:YGMZ ) didn't seem to impress investors. Our analysis has found some underlying factors which may be cause for concern.

View our latest analysis for MingZhu Logistics Holdings

A Closer Look At MingZhu Logistics Holdings' 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. 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.

For the year to June 2022, MingZhu Logistics Holdings had an accrual ratio of 0.48. As a general rule, that bodes poorly for future profitability. To wit, the company did not generate one whit of free cashflow in that time. Even though it reported a profit of US$1.06m, a look at free cash flow indicates it actually burnt through US$24m in the last year. We also note that MingZhu Logistics Holdings' free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of US$24m. Notably, the company has issued new shares, thus diluting existing shareholders and reducing their share of future earnings.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of MingZhu Logistics Holdings.

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. As it happens, MingZhu Logistics Holdings issued 20% more new shares over the last year. That means its earnings are split among a greater number of shares. To talk about net income, without noticing earnings per share, is to be distracted by the big numbers while ignoring the smaller numbers that talk to per share value. Check out MingZhu Logistics Holdings' historical EPS growth by clicking on this link.

A Look At The Impact Of MingZhu Logistics Holdings' Dilution On Its Earnings Per Share (EPS)

MingZhu Logistics Holdings' net profit dropped by 51% per year over the last three years. The good news is that profit was up 232% in the last twelve months. On the other hand, earnings per share are only up 81% over the same period. And so, you can see quite clearly that dilution is influencing shareholder earnings.

In the long term, earnings per share growth should beget share price growth. So MingZhu Logistics Holdings shareholders will want to see that EPS figure continue to increase. But on the other hand, we'd be far less excited to learn profit (but not EPS) was improving. For that reason, you could say that EPS is more important that net income in the long run, assuming the goal is to assess whether a company's share price might grow.

Our Take On MingZhu Logistics Holdings' Profit Performance

In conclusion, MingZhu Logistics Holdings has weak cashflow relative to earnings, which indicates lower quality earnings, and the dilution means its earnings per share growth is weaker than its profit growth. Considering all this we'd argue MingZhu Logistics Holdings' profits probably give an overly generous impression of its sustainable level of profitability. So while earnings quality is important, it's equally important to consider the risks facing MingZhu Logistics Holdings at this point in time. To help with this, we've discovered 5 warning signs (3 are significant!) that you ought to be aware of before buying any shares in MingZhu Logistics Holdings.

In this article we've looked at a number of factors that can impair the utility of profit numbers, and we've come away cautious. 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. 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.