Broadly speaking, profitable businesses are less risky than unprofitable ones. 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 PZ Cussons (LON:PZC).
We like the fact that PZ Cussons made a profit of UK£26.1m on its revenue of UK£689.4m, in the last year. The chart below shows that both revenue and profit have declined over the last three years.
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 PZ Cussons’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?
For anyone who wants to understand PZ Cussons’s profit beyond the statutory numbers, it’s important to note that during the last twelve months statutory profit was reduced by UK£37m due to unusual items. 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 that’s hardly a surprise given these line items are considered unusual. PZ Cussons took a rather significant hit from unusual items in the year to May 2019. As a result, we can surmise that the unusual items made its statutory profit significantly weaker than it would otherwise be.
Our Take On PZ Cussons’s Profit Performance
As we mentioned previously, the PZ Cussons’s profit was hampered by unusual items in the last year. Based on this observation, we consider it possible that PZ Cussons’s statutory profit actually understates its earnings potential! On the other hand, its EPS actually shrunk in the last twelve months. 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. While it’s really important to consider how well a company’s statutory earnings represent its true earnings power, it’s also worth taking a look at what analysts are forecasting for the future. So feel free to check out our free graph representing analyst forecasts.
This note has only looked at a single factor that sheds light on the nature of PZ Cussons’s profit. But there is always more to discover if you are capable of focussing your mind on minutiae. 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 firstname.lastname@example.org. 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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