Should You Use Balta Group's (EBR:BALTA) Statutory Earnings To Analyse It?

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. In this article, we'll look at how useful this year's statutory profit is, when analysing Balta Group (EBR:BALTA).

It's good to see that over the last twelve months Balta Group made a profit of €10.4m on revenue of €671.2m. 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.

Check out our latest analysis for Balta Group

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. As a reuslt, we think it's important to consider how unusual items and the recent tax benefit have influenced Balta Group's statutory profit. 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.

The Impact Of Unusual Items On Profit

To properly understand Balta Group's profit results, we need to consider the €6.6m expense attributed to unusual items. While deductions due to unusual items are disappointing in the first instance, there is a silver lining. We looked at thousands of listed companies and found that unusual items are very often one-off in nature. And, after all, that's exactly what the accounting terminology implies. If Balta Group doesn't see those unusual expenses repeat, then all else being equal we'd expect its profit to increase over the coming year.

An Unusual Tax Situation

Just as we noted the unusual items, we must inform you that Balta Group received a tax benefit which contributed €7.4m to the bottom line. 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! 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.

Our Take On Balta Group's Profit Performance

In the last year Balta Group received a tax benefit, which boosted its profit in a way that might not be much more sustainable than turning prime farmland into gas fields. Having said that, it also had a unusual item reducing its profit. Based on these factors, it's hard to tell if Balta Group's profits are a reasonable reflection of its underlying profitability. If you want to do dive deeper into Balta Group, you'd also look into what risks it is currently facing. To that end, you should learn about the 3 warning signs we've spotted with Balta Group (including 1 which can't be ignored).

Our examination of Balta Group 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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