Canadian Pacific Railway Limited's (TSE:CP) robust recent earnings didn't do much to move the stock. We think this is due to investors looking beyond the statutory profits and being concerned with what they see.
How Do Unusual Items Influence Profit?
For anyone who wants to understand Canadian Pacific Railway's profit beyond the statutory numbers, it's important to note that during the last twelve months statutory profit gained from CA$501m 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 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 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 Canadian Pacific Railway's Profit Performance
We'd posit that Canadian Pacific Railway's statutory earnings aren't a clean read on ongoing productivity, due to the large unusual item. Therefore, it seems possible to us that Canadian Pacific Railway's true underlying earnings power is actually less than its statutory profit. But at least holders can take some solace from the 54% per annum growth in EPS for the last three. 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. So while earnings quality is important, it's equally important to consider the risks facing Canadian Pacific Railway at this point in time. For example, Canadian Pacific Railway has 2 warning signs (and 1 which is potentially serious) we think you should know about.
This note has only looked at a single factor that sheds light on the nature of Canadian Pacific Railway'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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