VanEck: Focus on Gold Miners’ Cash Flow – Not Earnings
Investors typically use earnings to gauge a company’s performance across industries. But some earnings are better than others. For a tech company, earnings may not be strong as the company is focusing on developing a new product or service. They may not have earnings at all, but can still grow.
For other companies, cash flow may be a better measure. That can indicate how well a company is performing, without getting into the accounting changes that lead to earnings.
That’s particularly true when looking at commodity-producing companies such as gold miners. For a mining company, their forecasts are based on properties that are being mined.
But those earnings can be heavily adjusted by a number of accounting factors. That includes non-cash items and mine depletion allowances. And earnings can be impacted by non-performing mines that need to be started up first.
Plus, with the variable costs of gold prices, predicting earnings can be tough. That’s why a focus on cash flow may prove superior for determining long-term value.
Looking at the free cash flow per ounce of gold, for instance, investors can get a better gauge as to the value of a mining company. And that makes it easier to take an apples-to-apples comparison across the space.
This kind of cash-flow analysis could also work with any other commodity-driven business.