Are Advance Auto Parts’s (NYSE:AAP) Statutory Earnings A Good Guide To Its Underlying Profitability?

As a general rule, we think profitable companies are less risky than companies that lose money. Having said that, sometimes statutory profit levels are not a good guide to ongoing profitability, because some short term one-off factor has impacted profit levels. Today we’ll focus on whether this year’s statutory profits are a good guide to understanding Advance Auto Parts (NYSE:AAP).

While Advance Auto Parts was able to generate revenue of US$9.70b in the last twelve months, we think its profit result of US$444.4m was more important. As you can see in the chart below, its revenue and profit have both been steady over the last few years.

Check out our latest analysis for Advance Auto Parts

NYSE:AAP Income Statement, January 3rd 2020
NYSE:AAP Income Statement, January 3rd 2020

Importantly, statutory profits are not always the best tool for understanding a company’s true earnings power, so it’s well worth examining profits in a little more detail. This article will discuss how unusual items have impacted Advance Auto Parts’s most recent profit results. That might leave you wondering what analysts are forecasting in terms of future profitability. Luckily, you can click here to see an interactive graph depicting future profitability, based on their estimates.

The Impact Of Unusual Items On Profit

To properly understand Advance Auto Parts’s profit results, we need to consider the US$95m expense attributed to unusual items. While deductions due to unusual items are disappointing in the first instance, there is a silver lining. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. And that’s hardly a surprise given these line items are considered unusual. If Advance Auto Parts doesn’t see those unusual expenses repeat, then all else being equal we’d expect its profit to increase over the coming year.

Our Take On Advance Auto Parts’s Profit Performance

Unusual items (expenses) detracted from Advance Auto Parts’s earnings over the last year, but we might see an improvement next year. Based on this observation, we consider it likely that Advance Auto Parts’s statutory profit actually understates its earnings potential! And it’s also good to see that its earnings per share have improved a bit over the last three years. At the end of the day, it’s essential to consider more than just the factors above, if you want to understand the company properly. Ultimately, this article has formed an opinion based on historical data. However, it can also be great to think about what analysts are forecasting for the future. So feel free to check out our free graph representing analyst forecasts.

This note has only looked at a single factor that sheds light on the nature of Advance Auto Parts’s profit. But there are plenty of other ways to inform your opinion of a company. Some people consider a high return on equity to be a good sign of a quality business. While it might take a little research on your behalf, you may find this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying to be useful.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.

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