Novartis' (VTX:NOVN) Performance Is Even Better Than Its Earnings Suggest

Novartis AG (VTX:NOVN) just reported healthy earnings but the stock price didn't move much. We think that investors have missed some encouraging factors underlying the profit figures.

We've discovered 1 warning sign about Novartis. View them for free.

The Impact Of Unusual Items On Profit

For anyone who wants to understand Novartis' profit beyond the statutory numbers, it's important to note that during the last twelve months statutory profit was reduced by US$2.2b due to unusual items. While deductions due to unusual items are disappointing in the first instance, there is a silver lining. 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 Novartis to produce a higher profit next year, all else being equal.

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 Novartis' Profit Performance

Unusual items (expenses) detracted from Novartis' earnings over the last year, but we might see an improvement next year. Because of this, we think Novartis' earnings potential is at least as good as it seems, and maybe even better! And the EPS is up 46% over the last twelve months. 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. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. In terms of investment risks, we've identified 1 warning sign with Novartis, and understanding it should be part of your investment process.

Today we've zoomed in on a single data point to better understand the nature of Novartis' profit. But there is always more to discover if you are capable of focussing your mind on minutiae. 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 with high insider ownership.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.