XRF Scientific (ASX:XRF) Strong Profits May Be Masking Some Underlying Issues

The recent earnings posted by XRF Scientific Limited (ASX:XRF) were solid, but the stock didn't move as much as we expected. However the statutory profit number doesn't tell the whole story, and we have found some factors which might be of concern to shareholders.

View our latest analysis for XRF Scientific

How Do Unusual Items Influence Profit?

For anyone who wants to understand XRF Scientific's profit beyond the statutory numbers, it's important to note that during the last twelve months statutory profit gained from AU$721k worth of unusual items. 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 analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. And, after all, that's exactly what the accounting terminology implies. Assuming those unusual items don't show up again in the current year, we'd thus expect profit to be weaker next year (in the absence of business growth, that is).

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.

Our Take On XRF Scientific's Profit Performance

We'd posit that XRF Scientific's statutory earnings aren't a clean read on ongoing productivity, due to the large unusual item. Therefore, it seems possible to us that XRF Scientific's true underlying earnings power is actually less than its statutory profit. But the good news is that its EPS growth over the last three years has been very impressive. 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 want to do dive deeper into XRF Scientific, you'd also look into what risks it is currently facing. You'd be interested to know, that we found 2 warning signs for XRF Scientific and you'll want to know about them.

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