We Wouldn't Rely On Linz Textil Holding's (VIE:LTH) Statutory Earnings As A Guide

Statistically speaking, it is less risky to invest in profitable companies than in unprofitable ones. That said, the current statutory profit is not always a good guide to a company's underlying profitability. Today we'll focus on whether this year's statutory profits are a good guide to understanding Linz Textil Holding (VIE:LTH).

We like the fact that Linz Textil Holding made a profit of €6.63m on its revenue of €84.4m, in the last year. The chart below shows how profit has actually increased over the last three years, even while revenue has declined.

View our latest analysis for Linz Textil Holding

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 Linz Textil Holding'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 Linz Textil Holding.

The Impact Of Unusual Items On Profit

Importantly, our data indicates that Linz Textil Holding's profit received a boost of €15m in unusual items, over the last year. While we like to see profit increases, we tend to be a little more cautious when unusual items have made a big contribution. 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. And, after all, that's exactly what the accounting terminology implies. Linz Textil Holding had a rather significant contribution from unusual items relative to its profit to June 2020. As a result, we can surmise that the unusual items are making its statutory profit significantly stronger than it would otherwise be.

Our Take On Linz Textil Holding's Profit Performance

As we discussed above, we think the significant positive unusual item makes Linz Textil Holding'searnings a poor guide to its underlying profitability. As a result, we think it may well be the case that Linz Textil Holding's underlying earnings power is lower than its statutory profit. But at least holders can take some solace from the 35% per annum growth in EPS for the last three. 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. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. In terms of investment risks, we've identified 2 warning signs with Linz Textil Holding, and understanding these should be part of your investment process.

This note has only looked at a single factor that sheds light on the nature of Linz Textil Holding'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. 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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