Are Jazz Pharmaceuticals’s (NASDAQ:JAZZ) Statutory Earnings A Good Reflection Of Its Earnings Potential?

Many investors consider it preferable to invest in profitable companies over unprofitable ones, because profitability suggests a business is sustainable. That said, the current statutory profit is not always a good guide to a company’s underlying profitability. Today we’ll focus on whether this year’s statutory profits are a good guide to understanding Jazz Pharmaceuticals (NASDAQ:JAZZ).

It’s good to see that over the last twelve months Jazz Pharmaceuticals made a profit of US$280.3m on revenue of US$2.19b. The chart below shows how it has grown revenue over the last three years, but that profit has declined.

Check out our latest analysis for Jazz Pharmaceuticals

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NasdaqGS:JAZZ Earnings and Revenue History July 23rd 2020

Of course, when it comes to statutory profit, the devil is often in the detail, and we can get a better sense for a company by diving deeper into the financial statements. This article, will discuss how unusual items and a tax benefit have impacted Jazz Pharmaceuticals’ most recent bottom line 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.

How Do Unusual Items Influence Profit?

Importantly, our data indicates that Jazz Pharmaceuticals’ profit was reduced by US$447.3m, due to unusual items, over the last year. It’s never great to see unusual items costing the company profits, but on the upside, things might improve sooner rather than later. 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. In the twelve months to March 2020, Jazz Pharmaceuticals had a big unusual items expense. All else being equal, this would likely have the effect of making the statutory profit look worse than its underlying earnings power.

An Unusual Tax Situation

Having already discussed the impact of the unusual items, we should also note that Jazz Pharmaceuticals received a tax benefit of US$154m. It’s always a bit noteworthy when a company is paid by the tax man, rather than paying the tax man. Of course, prima facie it’s great to receive a tax benefit. However, our data indicates that tax benefits can temporarily boost statutory profit in the year it is booked, but subsequently profit may fall back. Assuming the tax benefit is not repeated every year, we could see its profitability drop noticeably, all else being equal. While we think it’s good that the company has booked a tax benefit, it does mean that there’s every chance the statutory profit will come in a lot higher than it would be if the income was adjusted for one-off factors.

Our Take On Jazz Pharmaceuticals’s Profit Performance

In its last report Jazz Pharmaceuticals received a tax benefit which might make its profit look better than it really is on a underlying level. But on the other hand, it also saw an unusual item depress its profit. Considering all the aforementioned, we’d venture that Jazz Pharmaceuticals’s profit result is a pretty good guide to its true profitability, albeit a bit on the conservative side. So if you’d like to dive deeper into this stock, it’s crucial to consider any risks it’s facing. Every company has risks, and we’ve spotted 3 warning signs for Jazz Pharmaceuticals you should know about.

Our examination of Jazz Pharmaceuticals has focussed on certain factors that can make its earnings look better than they are. But there are plenty of other ways to inform your opinion of a company. 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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