Viva Energy Group's (ASX:VEA) Promising Earnings May Rest On Soft Foundations

Despite announcing strong earnings, Viva Energy Group Limited's (ASX:VEA) stock was sluggish. We did some digging and found some worrying underlying problems.

Check out our latest analysis for Viva Energy Group

How Do Unusual Items Influence Profit?

Importantly, our data indicates that Viva Energy Group's profit received a boost of AU$88m 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 that's as you'd expect, given these boosts are described as 'unusual'. 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 Viva Energy Group's Profit Performance

Arguably, Viva Energy Group's statutory earnings have been distorted by unusual items boosting profit. Because of this, we think that it may be that Viva Energy Group's statutory profits are better than its underlying earnings power. The good news is that it earned a profit in the last twelve months, despite its previous loss. 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. So while earnings quality is important, it's equally important to consider the risks facing Viva Energy Group at this point in time. To help with this, we've discovered 4 warning signs (1 can't be ignored!) that you ought to be aware of before buying any shares in Viva Energy Group.

Today we've zoomed in on a single data point to better understand the nature of Viva Energy Group'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 with significant insider holdings to be useful.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.