Are Graham Holdings’s (NYSE:GHC) Statutory Earnings A Good Guide To Its Underlying Profitability?

It might be old fashioned, but we really like to invest in companies that make a profit, each and every year. However, sometimes companies receive a one-off boost (or reduction) to their profit, and it’s not always clear whether statutory profits are a good guide, going forward. In this article, we’ll look at how useful this year’s statutory profit is, when analysing Graham Holdings (NYSE:GHC).

It’s good to see that over the last twelve months Graham Holdings made a profit of US$173.5m on revenue of US$2.89b. In the chart below, you can see that its profit and revenue have both grown over the last three years, although its profit has slipped in the last twelve months.

Check out our latest analysis for Graham Holdings

earnings-and-revenue-history
NYSE:GHC Earnings and Revenue History August 19th 2020

Of course, it is only sensible to look beyond the statutory profits and question how well those numbers represent the sustainable earnings power of the business. This article will focus on the impact unusual items have had on Graham Holdings’ statutory earnings. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Graham Holdings.

How Do Unusual Items Influence Profit?

Importantly, our data indicates that Graham Holdings’ profit was reduced by US$26.9m, due to unusual items, over the last year. 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. Assuming those unusual expenses don’t come up again, we’d therefore expect Graham Holdings to produce a higher profit next year, all else being equal.

Our Take On Graham Holdings’ Profit Performance

Because unusual items detracted from Graham Holdings’ earnings over the last year, you could argue that we can expect an improved result in the current quarter. Because of this, we think Graham Holdings’ earnings potential is at least as good as it seems, and maybe even better! And the EPS is up 39% annually, over the last three years. Of course, we’ve only just scratched the surface when it comes to analysing its earnings; one could also consider margins, forecast growth, and return on investment, among other factors. So while earnings quality is important, it’s equally important to consider the risks facing Graham Holdings at this point in time. You’d be interested to know, that we found 1 warning sign for Graham Holdings and you’ll want to know about it.

This note has only looked at a single factor that sheds light on the nature of Graham Holdings’ profit. But there is always more to discover if you are capable of focussing your mind on minutiae. For example, many people consider a high return on equity as an indication of favorable business economics, while others like to ‘follow the money’ and search out stocks that insiders are buying. 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.

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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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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