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The market shrugged off Ivanhoe Mines Ltd.'s (TSE:IVN) solid earnings report. Our analysis showed that there are some concerning factors in the earnings that investors may be cautious of.
Check out our latest analysis for Ivanhoe Mines
Examining Cashflow Against Ivanhoe Mines' 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 it's not a problem to have a positive accrual ratio, indicating a certain level of non-cash profits, a high accrual ratio is arguably a bad thing, because it indicates paper profits are not matched by cash flow. 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 December 2024, Ivanhoe Mines had an accrual ratio of 0.20. We can therefore deduce that its free cash flow fell well short of covering its statutory profit. Over the last year it actually had negative free cash flow of US$644m, in contrast to the aforementioned profit of US$228.1m. We also note that Ivanhoe Mines' free cash flow was actually negative last year as well, so we could understand if shareholders were bothered by its outflow of US$644m. Unfortunately for shareholders, the company has also been issuing new shares, diluting their share of future earnings.
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.
One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. Ivanhoe Mines expanded the number of shares on issue by 6.6% over the last year. Therefore, each share now receives a smaller portion of profit. 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. You can see a chart of Ivanhoe Mines' EPS by clicking here.
A Look At The Impact Of Ivanhoe Mines' Dilution On Its Earnings Per Share (EPS)
Ivanhoe Mines has improved its profit over the last three years, with an annualized gain of 313% in that time. In comparison, earnings per share only gained 280% over the same period. Net income was down 28% over the last twelve months. But the EPS result was even worse, with the company recording a decline of 34%. So you can see that the dilution has had a bit of an impact on shareholders.