As a general rule, we think profitable companies are less risky than companies that lose money. 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 ConocoPhillips (NYSE:COP).
While ConocoPhillips was able to generate revenue of US$25.1b in the last twelve months, we think its profit result of US$2.30b was more important. Even though revenue is down over the last three years, you can see in the chart below that the company has moved from loss-making to profitable.
Not all profits are equal, and we can learn more about the nature of a company’s past profitability by diving deeper into the financial statements. This article will focus on the impact unusual items have had on ConocoPhillips’ 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?
To properly understand ConocoPhillips’ profit results, we need to consider the US$399m gain attributed to unusual items. While it’s always nice to have higher profit, a large contribution from unusual items sometimes dampens our enthusiasm. We ran the numbers on most publicly listed companies worldwide, and it’s very common for unusual items to be once-off in nature. And that’s as you’d expect, given these boosts are described as ‘unusual’. If ConocoPhillips doesn’t see that contribution repeat, then all else being equal we’d expect its profit to drop over the current year.
Our Take On ConocoPhillips’ Profit Performance
We’d posit that ConocoPhillips’ statutory earnings aren’t a clean read on ongoing productivity, due to the large unusual item. Because of this, we think that it may be that ConocoPhillips’ statutory profits are better than its underlying earnings power. In further bad news, its earnings per share decreased in the last year. At the end of the day, it’s essential to consider more than just the factors above, if you want to understand the company properly. With this in mind, we wouldn’t consider investing in a stock unless we had a thorough understanding of the risks. Every company has risks, and we’ve spotted 4 warning signs for ConocoPhillips you should know about.
This note has only looked at a single factor that sheds light on the nature of ConocoPhillips’ 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.
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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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