Stock Analysis

We Wouldn't Rely On Exco Technologies's (TSE:XTC) Statutory Earnings As A Guide

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TSX:XTC
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Broadly speaking, profitable businesses are less risky than unprofitable ones. That said, the current statutory profit is not always a good guide to a company's underlying profitability. This article will consider whether Exco Technologies' (TSE:XTC) statutory profits are a good guide to its underlying earnings.

While Exco Technologies was able to generate revenue of CA$412.3m in the last twelve months, we think its profit result of CA$27.4m was more important. In the last few years both its revenue and its profit have fallen, as you can see in the chart below.

Check out our latest analysis for Exco Technologies

earnings-and-revenue-history
TSX:XTC Earnings and Revenue History December 22nd 2020

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 focus on the impact unusual items have had on Exco Technologies' statutory earnings. 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.

How Do Unusual Items Influence Profit?

Importantly, our data indicates that Exco Technologies' profit received a boost of CA$7.2m 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. We ran the numbers on most publicly listed companies worldwide, and it's very common for unusual items to be once-off in nature. And, after all, that's exactly what the accounting terminology implies. Exco Technologies had a rather significant contribution from unusual items relative to its profit to September 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 Exco Technologies' Profit Performance

As we discussed above, we think the significant positive unusual item makes Exco Technologies'earnings a poor guide to its underlying profitability. As a result, we think it may well be the case that Exco Technologies' underlying earnings power is lower than its statutory profit. But at least holders can take some solace from the 6.1% EPS growth in the last year. The goal of this article has been to assess how well we can rely on the statutory earnings to reflect the company's potential, but there is plenty more to consider. If you'd like to know more about Exco Technologies as a business, it's important to be aware of any risks it's facing. In terms of investment risks, we've identified 2 warning signs with Exco Technologies, and understanding these should be part of your investment process.

Today we've zoomed in on a single data point to better understand the nature of Exco Technologies' 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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