Velan's (TSE:VLN) Shareholders May Want To Dig Deeper Than Statutory Profit

The recent earnings posted by Velan Inc. (TSE:VLN) were solid, but the stock didn't move as much as we expected. We think this is due to investors looking beyond the statutory profits and being concerned with what they see.

See our latest analysis for Velan

How Do Unusual Items Influence Profit?

For anyone who wants to understand Velan's profit beyond the statutory numbers, it's important to note that during the last twelve months statutory profit gained from US$5.6m worth of unusual items. We can't deny that higher profits generally leave us optimistic, but we'd prefer it if the profit were to be sustainable. 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'. We can see that Velan's positive unusual items were quite significant relative to its profit in the year to February 2021. All else being equal, this would likely have the effect of making the statutory profit a poor guide to underlying earnings power.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Velan.

Our Take On Velan's Profit Performance

As we discussed above, we think the significant positive unusual item makes Velan's earnings a poor guide to its underlying profitability. For this reason, we think that Velan's statutory profits may be a bad guide to its underlying earnings power, and might give investors an overly positive impression of the company. 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 Velan at this point in time. To that end, you should learn about the 2 warning signs we've spotted with Velan (including 1 which can't be ignored).

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