Should You Use Engenco's (ASX:EGN) Statutory Earnings To Analyse It?

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 Engenco (ASX:EGN).

While Engenco was able to generate revenue of AU$180.6m in the last twelve months, we think its profit result of AU$13.4m was more important. In the chart below, you can see that its profit and revenue have both grown over the last three years, although its profit has slipped in the last twelve months.

Check out our latest analysis for Engenco

Of course, it is only sensible to look beyond the statutory profits and question how well those numbers represent the sustainable earnings power of the business. Therefore, we think it makes sense to note and understand the impact that a tax benefit has had on Engenco's 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 Engenco.

An Unusual Tax Situation

We can see that Engenco received a tax benefit of AU$3.3m. It's always a bit noteworthy when a company is paid by the tax man, rather than paying the tax man. We're sure the company was pleased with its tax benefit. However, the devil in the detail is that these kind of benefits only impact in the year they are booked, and are often one-off in nature. In the likely event the tax benefit is not repeated, we'd expect to see its statutory profit levels drop, at least in the absence of strong growth.

Our Take On Engenco's Profit Performance

As we have already discussed Engenco reported that it received a tax benefit, rather than paying tax, in the last year. Given that sort of benefit is not recurring, a focus on the statutory profit might make the company seem better than it really is. Because of this, we think that it may be that Engenco's statutory profits are better than its underlying earnings power. Nonetheless, it's still worth noting that its earnings per share have grown at 56% over the last three years. 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. If you'd like to know more about Engenco as a business, it's important to be aware of any risks it's facing. For example, we've discovered 1 warning sign that you should run your eye over to get a better picture of Engenco.

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

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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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