Does TransAlta Renewables's (TSE:RNW) Statutory Profit Adequately Reflect Its Underlying Profit?

By
Simply Wall St
Published
October 19, 2020
TSX:RNW

Broadly speaking, profitable businesses are less risky than unprofitable ones. Having said that, sometimes statutory profit levels are not a good guide to ongoing profitability, because some short term one-off factor has impacted profit levels. Today we'll focus on whether this year's statutory profits are a good guide to understanding TransAlta Renewables (TSE:RNW).

While TransAlta Renewables was able to generate revenue of CA$415.0m in the last twelve months, we think its profit result of CA$105.0m was more important. One positive is that it has grown both its profit and its revenue, over the last few years, though not in the last twelve months.

See our latest analysis for TransAlta Renewables

earnings-and-revenue-history
TSX:RNW Earnings and Revenue History October 19th 2020

Not all profits are equal, and we can learn more about the nature of a company's past profitability by diving deeper into the financial statements. This article will focus on the impact unusual items have had on TransAlta Renewables' 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 TransAlta Renewables' profit beyond the statutory numbers, it's important to note that during the last twelve months statutory profit was reduced by CA$27m 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 TransAlta Renewables to produce a higher profit next year, all else being equal.

Our Take On TransAlta Renewables' Profit Performance

Unusual items (expenses) detracted from TransAlta Renewables' earnings over the last year, but we might see an improvement next year. Based on this observation, we consider it likely that TransAlta Renewables' statutory profit actually understates its earnings potential! Unfortunately, though, its earnings per share actually fell back over the last year. 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. In light of this, if you'd like to do more analysis on the company, it's vital to be informed of the risks involved. To help with this, we've discovered 2 warning signs (1 is significant!) that you ought to be aware of before buying any shares in TransAlta Renewables.

This note has only looked at a single factor that sheds light on the nature of TransAlta Renewables' 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. 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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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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