The Sayona Mining Ltd (ASX: SYA) share price closed flat on Thursday at 20 cents. That extends its gains to around 25% over the past week.
Zooming out, and investors have bid the share almost 54% higher for the year to date, putting it well ahead of the majority of the ASX's laggards. Seen below is its return for the past 12 months.
Is Sayona Mining profitable?
Here we're talking about the company and not the share price. We'll use Sayona Mining's H1 FY22 results as it is yet to report its full-year earnings.
In order to answer this question, we have to dive deep into the notes of its financial statements and understand how it books income, its accounting policies, and so on.
Sayona Mining printed no revenue in H1 FY22, and recognised an operating loss of $8 million and a pre-tax loss of $13 million.
Hence it is unprofitable at the operating income level, and pre-tax margins are also negative.
Curiously, however, despite its loss on operating income, the company actually booked a net profit after tax (NPAT) of $98 million, up from a loss of $3.4 million the year prior.
One might look to this and argue that Sayona is, in fact, profitable – it did produce an NPAT, after all. However, as strange as it seems, net profit is not the best measure of profitability, at all.
Sayona was 'technically' profitable on a statutory basis based on current accounting standards. However, operationally, the company is yet to draw any revenues, meaning the company is unable to be considered 'operationally' profitable.
Various accounting policies mean that income is booked in various ways, and hence more analysis must be done to uncover the 'true' profitability of the company.
Let's break it down
First, addressing the NPAT issue. A quick look at Sayona Mining's half-yearly report shows that it recognised $108.5 million in "other income", also known as non-recurring income.
In Note 4 to the statements, "significant transactions and events", it recognised this from the "gain from a bargain purchase of A$108.4 million" of North American Lithium Inc. (NAL).
Basically, NAL had filed for bankruptcy protection in FY19, and it took until FY21 for Sayona's bid to get approved.
As such, Sayona Mining notes that it has made a $108.4 million accounting gain on the acquisition of North American Lithium.
However, as noted, the income is booked under an accounting concept known as a bargain purchase.
Simply, when an acquiring company buys another company whose fair value is greater than what the acquirer paid for it, that is a bargain purchase. This often happens in distressed situations.
However, there is no cash flow/revenue attached to this 'income'. It is simply an accounting factor that measures the difference between the fair value of an asset and the price paid, and then books this as income.
On the income statement, this line is situated below earnings before interest, taxes, depreciation and amortisation (EBITDA), operating income and other pre-tax earnings.
Hence why Sayona Mining booked a $93 million net profit after deducting all the costs associated with the bargain purchase. When backing this $108 million unrealised gain out of the equation, it printed a net loss of $15 million.
Additionally, there are more meaningful ways to measure profitability than just income. Its gross net margins are each negative as well, when making this necessary adjustment.
In addition, return on equity (ROE) is a minus 4.7% in H1 FY22, whereas the return on assets is a negative 3.4%. It also has yet to generate a positive return on invested capital.
Free cash flow – the lifeblood of corporate value – was also in the red at almost $12 million last half.
Hence, after analysing Sayona's financial statements in greater detail, and making the necessary accounting adjustments, it shows that the company remains unprofitable by all measures.
