Understanding Earnings Statements of a Mining Company

The earnings statement, sometimes called the income statement or profit-and-loss statement, shows how much money a company made or lost during the year from the sale of products or services, and the expenses the company incurred for wages, operating costs, etc. The difference between how much was taken in and how much was spent is the net earnings, or profit, of the company. This money is used to re-invest in the company and to pay dividends to shareholders.

The earnings statement is divided into four main sections: the operating section, the non-operating section, the creditors’ section, and the owners’ section.

The operating section lists income from the sale of the company’s goods or services, minus the cost of sales (labor, energy, etc.) This provides the gross operating profit.

In the non-operating section, non-operating income, such as interest and dividends from company investments, is added to the net operating profit. To this is added “extraordinary items”, which are any unusual and significant additions to income or losses (the one-time sale of a large asset, for example). The sum of these represents the company’s remaining income from all sources.

Payments to creditors are listed in the creditors’ section. These usually take the form of fixed interest charges on bank loans and interest charges to other debt-holders who have lent money to the company. These payments are deducted from the income of the company.

Finally, we have the owners section, which shows the company’s net earnings or deficit. The net earnings are shifted to the retained earnings statement, which shows the total annual earnings retained after payment of all expenses and dividends.

The Retained Earnings Statement: This portion of the annual report shows the amount of earnings which have been kept in the business, either as cash or reinvested in new assets. Stated another way, it reveals the excess of net earnings that have been accumulated by a company year-by-year, over and above dividends paid out to shareholders.

Changes in Financial Position: This section of the report explains changes in working capital (current assets minus current liabilities) between two consecutive years. It goes by many names (including “Source and Application of Funds Statement” and “Source and Use of Funds Statement”), but basically acts as a bridge between a company’s balance sheet for those two years. It also summarizes how a company raised financings for the year and how those financings were used.

Auditor’s Report: Companies are legally required to appoint an outside, independent accountant to represent shareholders and report to them each year on the company’s business. Essentially, the accountant’s job is to verify the accuracy of the company’s financial statements. The auditors report is usually quite brief, and gives assurance to shareholders that the annual report is a reliable indication of the financial health of the company.

Notes to the Financial Statement: Finally, interesting information is often found in the notes to the financial statements in annual reports. Study these carefully, as they will sometimes disclose details of law suits filed against the company, or other information useful to investors.