The subdued stock price reaction suggests that Globex Mining Enterprises Inc.'s (TSE:GMX) strong earnings didn't offer any surprises. Investors are probably missing some underlying factors which are encouraging for the future of the company.

Check out our latest analysis for Globex Mining Enterprises

A Closer Look At Globex Mining Enterprises' 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.

That means a negative accrual ratio is a good thing, because it shows that the company is bringing in more free cash flow than its profit would suggest. 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.

Globex Mining Enterprises has an accrual ratio of -0.11 for the year to June 2024. Therefore, its statutory earnings were quite a lot less than its free cashflow. In fact, it had free cash flow of CA$3.2m in the last year, which was a lot more than its statutory profit of CA$2.61m. Globex Mining Enterprises' free cash flow improved over the last year, which is generally good to see. Having said that, there is more to the story. The accrual ratio is reflecting the impact of unusual items on statutory profit, at least in part.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Globex Mining Enterprises.

How Do Unusual Items Influence Profit?

Globex Mining Enterprises' profit was reduced by unusual items worth CA$1.1m in the last twelve months, and this helped it produce high cash conversion, as reflected by its unusual items. This is what you'd expect to see where a company has a non-cash charge reducing paper profits. While deductions due to unusual items are disappointing in the first instance, there is a silver lining. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. And, after all, that's exactly what the accounting terminology implies. Globex Mining Enterprises took a rather significant hit from unusual items in the year to June 2024. All else being equal, this would likely have the effect of making the statutory profit look worse than its underlying earnings power.