Should You Rely On Dynamatic Technologies's (NSE:DYNAMATECH) Earnings Growth?

As a general rule, we think profitable companies are less risky than companies that lose money. 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. Today we'll focus on whether this year's statutory profits are a good guide to understanding Dynamatic Technologies (NSE:DYNAMATECH).

We like the fact that Dynamatic Technologies made a profit of ₹550.6m on its revenue of ₹13.2b, in the last year. Even though its revenue is down over the last three years, its profit has actually increased, as you can see, below.

See our latest analysis for Dynamatic Technologies

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. Therefore, we think it makes sense to note and understand the impact that a tax benefit has had on Dynamatic Technologies' statutory profit in the last twelve months. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Dynamatic Technologies.

An Unusual Tax Situation

We can see that Dynamatic Technologies received a tax benefit of ₹253m. This is of course a bit out of the ordinary, given it is more common for companies to be paying tax than receiving tax benefits! We're sure the company was pleased with its 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 Dynamatic Technologies' Profit Performance

As we have already discussed Dynamatic Technologies reported that it received a tax benefit, rather than paying tax, in the last year. As a result we don't think its profit result, which includes that tax-boost, is a good guide to its sustainable profit levels. Therefore, it seems possible to us that Dynamatic Technologies' true underlying earnings power is actually less than its statutory profit. But the good news is that its EPS growth over the last three years has been very impressive. The goal of this article has been to assess how well we can rely on the statutory earnings to reflect the company's potential, but there is plenty more to consider. If you'd like to know more about Dynamatic Technologies as a business, it's important to be aware of any risks it's facing. To that end, you should learn about the 2 warning signs we've spotted with Dynamatic Technologies (including 1 which doesn't sit too well with us).

This note has only looked at a single factor that sheds light on the nature of Dynamatic Technologies' 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. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.

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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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