Stock Analysis

Are CGI's (TSE:GIB.A) Statutory Earnings A Good Reflection Of Its Earnings Potential?

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TSX:GIB.A
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Statistically speaking, it is less risky to invest in profitable companies than in unprofitable ones. That said, the current statutory profit is not always a good guide to a company's underlying profitability. Today we'll focus on whether this year's statutory profits are a good guide to understanding CGI (TSE:GIB.A).

While CGI was able to generate revenue of CA$12.1b in the last twelve months, we think its profit result of CA$1.17b was more important. In the chart below, you can see that its profit and revenue have both grown over the last three years, although its profit has slipped in the last twelve months.

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earnings-and-revenue-history
TSX:GIB.A Earnings and Revenue History February 18th 2021

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 CGI's 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.

The Impact Of Unusual Items On Profit

For anyone who wants to understand CGI's profit beyond the statutory numbers, it's important to note that during the last twelve months statutory profit was reduced by CA$199m 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. If CGI doesn't see those unusual expenses repeat, then all else being equal we'd expect its profit to increase over the coming year.

Our Take On CGI's Profit Performance

Unusual items (expenses) detracted from CGI's earnings over the last year, but we might see an improvement next year. Based on this observation, we consider it likely that CGI's statutory profit actually understates its earnings potential! And on top of that, its earnings per share have grown at 27% per year over the last three years. 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 CGI, you'd also look into what risks it is currently facing. You'd be interested to know, that we found 1 warning sign for CGI and you'll want to know about this.

This note has only looked at a single factor that sheds light on the nature of CGI'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. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.

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