Canaan Inc.’s financial report analysis: How do mining companies navigate the bull and bear cycles?

Author: TaxDAO

In the past few years, Canaan has undergone a leapfrog change, through the bull and bear markets. At the same time, the company's operational capabilities, profitability and financial structure have also experienced many ups and downs. Behind some financial data, there are Canaan's tenacity and adaptability in different market environments, as well as the flexible response strategies it has adopted when facing challenges. This article will deeply analyze Canaan's financial performance in the past few years and explore its growth and development in the fluctuations of the industry.

1. Share Indicators

In terms of basic earnings per share, Canaan Technology suffered a loss in 2019, with negative earnings per share. The reasons are summarized as follows: due to the fierce market competition faced by the company in that year, sales were lower than expected, resulting in a decline in gross profit margin, which in turn caused losses. In addition, the company made large-scale R&D investments or capital expenditures in that year, which have not yet brought profits. The reduction in losses in 2020 is due to the company's adoption of some cost control measures to optimize production and operating efficiency, thereby reducing losses. At the same time, sales have rebounded, gross profit margins have improved, and some non-recurring gains have appeared, which helped to reduce losses.  

In 2021, Canaan Technology's profit increased, which can be attributed to the rise in the Bitcoin market, which led to an increase in the sales volume of mining machines and an increase in prices, increasing the company's revenue and profits. In addition, the company launched new products or services that year, which were recognized by the market and increased its profit sources. In 2022, the company's profits increased further, and market demand continued to grow, which led to a continuous increase in the company's profits. The company's returns on R&D investment also began to emerge, and new products and technological innovations were successful, driving profit growth. However, Canaan Technology suffered losses again in 2023, and earnings per share were negative again. This was due to the fluctuations in the Bitcoin market, which led to a decline in sales performance, a decrease in sales revenue, and a decrease in gross profit margin, resulting in losses. At the same time, Canaan Technology also encountered some non-recurring expenses or risks, such as inventory adjustments and provision for loss reserves, which affected profitability.  

As for net assets per share, let's analyze the changes in Canaan's net assets per share from 2019 to 2023:  

The net assets per share in 2019 were 1.49 yuan, and the relatively low net assets per share were because the company was still in the growth stage, the asset scale had not yet been fully formed, and the profitability was limited. At this stage, Canaan faced some challenges in the start-up stage and needed time to develop and expand.  

The net assets per share in 2020 were 25.46 yuan, and the net assets per share increased significantly, indicating that the company achieved significant profits and rapidly expanded its asset scale during the year. This means that the company implemented an effective profit growth strategy during the year, or made some major asset acquisitions or mergers, which increased the level of net assets. By 2021, the net assets per share became 20.13 yuan, which was a decrease from the previous year, but the net assets per share remained at a high level, indicating that the company's profits were still relatively stable. In 2022, the net assets per share dropped to 2.79 yuan. The sharp decline in net assets per share may be due to the impact on the company's profits caused by the volatility of the Bitcoin market, and the asset scale has not increased or has shrunk. The company also faced some non-recurring expenses or risks during the year, such as inventory adjustments and impairment provisions, which affected the level of net assets. In 2023, the net assets per share became 4.42 yuan, and the net assets per share rebounded, but it was still lower than the levels in 2019 and 2020, indicating that the company is working hard to cope with Bitcoin market fluctuations and other challenges. In general, Canaan Technology has experienced ups and downs in profits and changes in asset scale in the past few years, especially affected by the fluctuations in the Bitcoin market. The company may have adjusted its business strategy to adapt to different market environments and challenges.

2. Operational Capacity Analysis 

Canaan Technology performed poorly in terms of operating capacity in 2020, 2022 and 2023. The main reason is that it coincided with the Bitcoin bear market, and the demand for mining machines was low, resulting in slow inventory turnover.  

However, compared with 2020, Canaan Technology's operations have made great progress in 2022 and 2023. The main reasons are: (1) Driving mining improvements through technology, such as the company navigating changes in the regulatory environment through technological innovation and service optimization, and seeking long-term success in the mining industry; (2) Fund raising and cash flow management, such as the company successfully raising funds through the capital market and optimizing cash flow, enhancing its financial resilience and market responsiveness; (3) Mining asset growth, such as through diversified mining layout and improved operating time, the company has achieved significant growth in cryptocurrency assets, bringing additional revenue and asset appreciation potential to the company.

3. Profitability Analysis

In terms of return on equity: In 2019, Canaan Technology's return on equity was -221.58%, and the return on equity was negative, indicating that the ratio of the company's net profit to net assets was negative, and the company suffered a large loss. In 2020, the company's sub-asset return rate became -38.23%: the return on equity was still negative, but it was an improvement compared to 2019, but it still showed that the company faced challenges in profitability. By 2021, the return on net assets increased to 102.81%, reaching a relatively high level, indicating that the company has made good profits and used its assets well this year. From 2022 to 2023, the company's return on net assets gradually declined and fell to negative again, and the company's profitability declined.  

In terms of net profit margin, its trend is basically consistent with the return on net assets. As of the recent 2023, the company's sales revenue is currently insufficient to cover costs and expenses, and sales revenue needs to be improved.  

In terms of gross profit margin, from 2019 to 2023, Canaan Technology's gross profit margin increased from a negative value in 2019 to 57.17% in 2021, and then gradually declined and fell to a negative value again. The reason is that the company had high costs in the early stage, and then the operating conditions were good, and then the gross profit margin performance deteriorated due to changes in sales costs and sales prices.  

Overall, Canaan's profitability has fluctuated greatly in the past few years, and all indicators have fluctuated, all of which have been affected by factors such as the market environment and business strategy. The company needs to further optimize its operations and management to improve profitability and capital utilization efficiency. Canaan's performance in 2020 and 2023 was still due to the Bitcoin bear market, which made it difficult for Canaan to operate.  

4. Analysis of Financial Indicators 

Canaan Technology has shown certain changes in its asset-liability structure and liquidity indicators in the past few years: 

In terms of the debt-to-asset ratio, the company's debt-to-asset ratio has fluctuated in the past five years, showing an upward trend, among which the debt-to-asset ratios in 2020 and 2023 are relatively high, at 58.26% and 38.59% respectively.  

In terms of current ratio, the company's current ratio has also fluctuated, showing an overall downward trend, with the lowest current ratio in 2023 at 1.70. This means that the company's short-term debt repayment ability is relatively weak.  

Canaan's quick ratio also fluctuated, with a quick ratio of 1.32 in 2023, down from previous years. The quick ratio reflects the company's liquidity after deducting inventory, and a lower quick ratio suggests that the company will have difficulty repaying its debts payable in the short term.  

The company's equity multiplier has fluctuated over the past five years, reaching a peak of 2.40 in 2020 and then falling back. The equity multiplier reflects the degree of leverage of a company's assets, and a higher equity multiplier means that the company has adopted more debt funds.  

The company's current assets as a percentage of total assets have also fluctuated over the past five years, showing an overall downward trend, reaching 73.72% in 2023. The decline in the proportion of current assets may mean that more of the company's funds are being used for non-liquid assets or investment projects.  

At the same time, the proportion of the company's current liabilities to total liabilities has also fluctuated over the past five years, reaching 93.17% in 2023. The increase in the proportion of current liabilities indicates that the company has a large amount of short-term debt or that its liquid assets are insufficient to cover short-term debt.  

Based on the changes in the debt-to-asset ratio, current ratio, quick ratio and other indicators described above, Canaan's overall debt repayment ability has shown a downward trend. The main reasons include: (1) The debt-to-asset ratio has increased. In the past five years, the company's debt-to-asset ratio has shown an upward trend, especially in 2020 and 2023, when the debt-to-asset ratio was relatively high. This means that the company's debt pressure has increased. Relative to the size of assets, the debt ratio is high, which will have a certain impact on debt repayment ability; (2) The current ratio has decreased. The company's current ratio has also shown a downward trend. The current ratio in 2023 was the lowest, at 1.70, indicating that the short-term debt repayment ability is relatively weak; (3) The quick ratio has decreased. Similarly, the quick ratio has also shown a downward trend. The quick ratio in 2023 was 1.32, which was lower than that in previous years. The quick ratio reflects the company's liquidity after deducting inventory. A low quick ratio suggests that the company will have difficulty repaying its debts in the short term, which also affects its debt repayment ability. (4) The proportion of current assets to total assets has declined. In the past five years, the proportion of the company's current assets to total assets has also shown a downward trend, which may mean that more of the company's funds are used for non-liquid assets or investment projects, resulting in a decline in liquidity, which in turn affects its debt repayment ability. In summary, Canaan's debt repayment ability has shown an overall downward trend in the past few years. The main reasons include the increase in the debt-to-asset ratio, the decline in the current ratio and quick ratio, and the decline in the proportion of current assets. This requires the company to further optimize its asset-liability structure and improve its liquidity level to ensure the robustness and sustainability of its debt repayment ability. Overall, in terms of revenue and profit, the company experienced growth and decline in 2020 and 2021, respectively. The sharp increase in net profit in 2021 was mainly attributed to the peak of the cryptocurrency market. However, the market challenges faced in 2022 and 2023 led to a sharp decline in revenue and profit, especially a huge net loss in 2023, showing the negative impact of industry fluctuations on the company's profitability. In terms of sales, the decline in total sales computing power was mainly affected by the volatility of the cryptocurrency market. The continued decline in the market at the end of 2022 led to a sharp decline in total sales computing power, and there was a serious decline in the fourth quarter of 2022. The company continued to increase its investment in R&D, especially the sharp increase in R&D expenses in 2022, mainly to maintain competitiveness in new products and technologies, and to respond to market changes.  

5 Comprehensive Conclusion 

In summary, Canaan has experienced market ups and downs and challenges in the past five years, especially in 2022 and 2023, when it faced a sharp decline in revenue and profit. Canaan responded to challenges through technological innovation, R&D investment and market expansion in the face of industry fluctuations. In general, Canaan's improved financial performance in 2023 is mainly due to the following initiatives: 1. Canaan has strong capabilities in ASIC chip design and has successfully designed and produced high-performance Bitcoin mining machines. In addition, the company uses its technical expertise in ASIC design to actively expand into the AI ​​field and provide overall AI solutions including AI chips, algorithm development and optimization, hardware modules, terminal products and software services; 2. Through strategic cooperation with specific cryptocurrency mining farms, Canaan has entered the Bitcoin mining business. As the second growth engine, this business aims to leverage the Bitcoin ecosystem and generate synergies with Bitcoin mining machine sales. Canaan continues to increase computing power and improve computing power to enhance mining operations, thereby reducing inventory risks and improving financial and operating performance; 3. Canaan has improved its assembly capabilities for Bitcoin mining machines and AI chips through a combination of internal and external production resources, thereby achieving high quality, high yield and stable production. Canaan Technology has established long-term partnerships with leading global suppliers to ensure efficient and stable production; 4. From January 1, 2023, the company's reporting currency will be changed from RMB to US dollars to better reflect its global business development and future strategy. This move makes Canaan Technology's financial reporting more consistent and helps advance its strategy in the global market; 5. Canaan Technology has made breakthroughs in multiple technical fields such as low-voltage and high-power efficiency operation and high computing density, which are essential in ASICs for blockchain and AI solutions. In addition, Canaan Technology owns most of the intellectual property used and has accumulated valuable technology and multiple generations of proprietary silicon data through long-term ASIC design experience; 6. Canaan Technology plans to continue to expand its customer base, launch more products and solutions, and increase revenue from a wider range of customers, although it currently relies on a few customers to contribute a significant part of its revenue.  

Through these initiatives, Canaan Technology has achieved remarkable results in improving its technological capabilities, expanding its market, optimizing its operations and management costs, and thus achieved a more stable and strong financial performance in 2023. We believe that in the future, Canaan Technology will continue to pay attention to market changes, maintain its competitiveness, and adopt a proactive development strategy to achieve long-term growth.