Are CommsChoice Group's (ASX:CCG) Statutory Earnings A Good Reflection Of Its Earnings Potential?

It might be old fashioned, but we really like to invest in companies that make a profit, each and every year. 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. This article will consider whether CommsChoice Group's (ASX:CCG) statutory profits are a good guide to its underlying earnings.

While CommsChoice Group was able to generate revenue of AU$19.3m in the last twelve months, we think its profit result of AU$2.58m was more important. The good news is that the company managed to grow its revenue over the last three years, and also move from loss-making to profitable.

Check out our latest analysis for CommsChoice Group

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. As a reuslt, we think it's important to consider how unusual items and the recent tax benefit have influenced CommsChoice Group's statutory profit. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of CommsChoice Group.

How Do Unusual Items Influence Profit?

For anyone who wants to understand CommsChoice Group's profit beyond the statutory numbers, it's important to note that during the last twelve months statutory profit was reduced by AU$166.2k due to unusual items. It's never great to see unusual items costing the company profits, but on the upside, things might improve sooner rather than later. 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 expenses don't come up again, we'd therefore expect CommsChoice Group to produce a higher profit next year, all else being equal.

An Unusual Tax Situation

Having already discussed the impact of the unusual items, we should also note that CommsChoice Group received a tax benefit of AU$1.2m. 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. And given that it lost money last year, it seems possible that the benefit is evidence that it now expects to find value in its past tax losses. 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. Assuming the tax benefit is not repeated every year, we could see its profitability drop noticeably, all else being equal.

Our Take On CommsChoice Group's Profit Performance

In the last year CommsChoice Group received a tax benefit, which boosted its profit in a way that might not be much more sustainable than turning prime farmland into gas fields. Having said that, it also had a unusual item reducing its profit. Having considered these factors, we don't think CommsChoice Group's statutory profits give an overly harsh view of the business. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. While conducting our analysis, we found that CommsChoice Group has 3 warning signs and it would be unwise to ignore these bad boys.

Our examination of CommsChoice Group has focussed on certain factors that can make its earnings look better than they are. But there are plenty of other ways to inform your opinion of a company. 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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