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. This article will consider whether Glanbia‘s (ISE:GL9) statutory profits are a good guide to its underlying earnings.
While Glanbia was able to generate revenue of €3.88b in the last twelve months, we think its profit result of €180.2m was more important. While it managed to grow its revenue over the last three years, its profit has moved in the other direction, as you can see in the chart below.
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 focus on the impact unusual items have had on Glanbia’s statutory earnings. 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 Glanbia’s profit was reduced by €39m, 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, after all, that’s exactly what the accounting terminology implies. If Glanbia 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 Glanbia’s Profit Performance
Because unusual items detracted from Glanbia’s earnings over the last year, you could argue that we can expect an improved result in the current quarter. Based on this observation, we consider it likely that Glanbia’s statutory profit actually understates its earnings potential! On the other hand, its EPS actually shrunk in the last twelve months. 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. With this in mind, we wouldn’t consider investing in a stock unless we had a thorough understanding of the risks. While conducting our analysis, we found that Glanbia has 2 warning signs and it would be unwise to ignore these bad boys.
This note has only looked at a single factor that sheds light on the nature of Glanbia’s profit. 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.
If you spot an error that warrants correction, please contact the editor at email@example.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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