Mining for profits in the coal business usually involves mining actual coal. Hong Kong-listed Yanzhou Coal Mining found another source. The Chinese miner eked out 218 million yuan ($35 million) in net profit in the March quarter despite a collapse in coal prices.

Look beyond the bottom line, and the company drew down 576 million yuan of “special reserves” to lower the costs of selling goods, says Jefferies’ Laban Yu. These reserves, which exist under shareholder equity on the balance sheet, are earmarked under government rules for maintenance and safety. Without the move, Yanzhou would have booked a loss.

The cash flow statement doesn’t paper over these costs, though. Net cash from operations went up in smoke. Yanzhou lost 3.6 billion yuan during the quarter, compared with a negative cash flow of 747 million yuan a year ago. That’s a sign of distress. Had investors focused simply on profit and loss, they would have missed this canary in the coal mine.

The Wall Street Journal

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