Is There More To The Story Than Magadh Sugar & Energy's (NSE:MAGADSUGAR) Earnings Growth?

Many investors consider it preferable to invest in profitable companies over unprofitable ones, because profitability suggests a business is sustainable. 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 Magadh Sugar & Energy (NSE:MAGADSUGAR).

It's good to see that over the last twelve months Magadh Sugar & Energy made a profit of ₹830.4m on revenue of ₹9.16b. Happily, it has grown both its profit and revenue over the last three years, as you can see in the chart below.

View our latest analysis for Magadh Sugar & Energy

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 Magadh Sugar & Energy's most recent profit results. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Magadh Sugar & Energy.

How Do Unusual Items Influence Profit?

For anyone who wants to understand Magadh Sugar & Energy's profit beyond the statutory numbers, it's important to note that during the last twelve months statutory profit gained from ₹159m worth of unusual items. We can't deny that higher profits generally leave us optimistic, but we'd prefer it if the profit were to be sustainable. When we crunched the numbers on thousands of publicly listed companies, we found that a boost from unusual items in a given year is often not repeated the next year. Which is hardly surprising, given the name. Assuming those unusual items don't show up again in the current year, we'd thus expect profit to be weaker next year (in the absence of business growth, that is).

Our Take On Magadh Sugar & Energy's Profit Performance

Arguably, Magadh Sugar & Energy's statutory earnings have been distorted by unusual items boosting profit. Therefore, it seems possible to us that Magadh Sugar & Energy's true underlying earnings power is actually less than its statutory profit. The silver lining is that its EPS growth over the last year has been really wonderful, even if it's not a perfect measure. 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 Magadh Sugar & Energy at this point in time. To that end, you should learn about the 4 warning signs we've spotted with Magadh Sugar & Energy (including 1 which can't be ignored).

Today we've zoomed in on a single data point to better understand the nature of Magadh Sugar & Energy'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.

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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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