China Green Agriculture, Inc. :CGA-US: Earnings Analysis: 2016 By the Numbers : October 20, 2016

China Green Agriculture, Inc. reports financial results for the year ended June 30, 2016.

Highlights

  • Gross margins narrowed from 23.56% to 21.56% compared to the same period last year, operating (EBITDA) margins now 27.12% from 33.96%.
  • Change in operating cash flow of -49.12% compared to same period last year is about the same as change in earnings, likely no significant movement in accruals or reserves.
  • Earnings rose compared to same period last year, despite decline in operating and pretax margins.

The table below shows the preliminary results and recent trends for key metrics such as revenues and net income growth:

2012 2013 2014 2015 2016
Relevant Numbers (Annual)
Revenues 217.52 216.9 233.4 263.35 268.79
Revenue Growth (YOY) N/A N/A N/A N/A N/A
Earnings 41.96 44.77 25.51 31.45 24.7
Earnings Growth (YOY) 27.48 6.71 -43.01 23.24 -21.44
Net Margin 19.29 20.64 10.93 11.94 9.19
EPS 1.56 1.61 0.81 0.93 0.67
Return on Equity 19.33 16.61 8.11 8.92 6.65
Return on Assets 16.41 14.06 6.88 7.64 5.82

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Earnings Growth Analysis

The company’s year-on-year decline in earnings was influenced by a weakening in gross margins from 23.56% to 21.56%, as well as issues with cost controls. As a result, operating margins (EBITDA margins) went from 33.96% to 27.12% in this time frame. For comparison, gross margins were 23.56% and EBITDA margins were 33.96% in the previous period.

Gross Margin Trend

Companies sometimes sacrifice improvements in revenues and margins in order to extend friendlier terms to customers and vendors. Capital Cube probes for such activity by comparing the changes in gross margins with any changes in working capital. If the gross margins improved without a worsening of working capital, it is possible that the company’s performance is a result of truly delivering in the marketplace and not simply an accounting prop-up using the balance sheet.

Gross Margin History
Working Capital Days History

CGA-US‘s decline in gross margins has not produced any significant offsetting improvement in its working capital . This leads Capital Cube to conclude that the decline in gross margins are likely from operating issues and not trade-offs with the balance sheet. Working capital days are currently 363.14 days, compared to last year’s level of 287.38 days.

Cash Versus Earnings – Sustainable Performance?

CGA-US‘s year-on-year change in operating cash flow of -49.12% is around its change in earnings. This suggests that there are likely no significant movement in accruals or reserves for managing earnings this period.

Margins

Despite a decline in operating (EBIT) margins as well as a decline in pretax margins, the company’s earnings rose.

EBIT Margin History
PreTax Margin History

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Company Profile

China Green Agriculture, Inc. engages in the research, development, manufacture, distribution, and sale of humic acid based compound fertilizers, blended fertilizers, organic compound fertilizers, mixed organic-inorganic compound fertilizers, slow-release fertilizers and highly-concentrated water soluble fertilizers, mixed organic-inorganic compound fertilizers. It also engages in the development, production, and distribution of agricultural products, such as fruits, vegetables, flowers, and colored seedlings. It operates through the following three segments: Fertilizer Products (Jinong), Fertilizer Products (Gufeng), and Agricultural Products (Yuxing). The company was founded by Tao Li on February 6, 1987 and is headquartered in Xi’an, China.

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