We Think Compañía Chilena de Fósforos' (SNSE:FOSFOROS) Robust Earnings Are Conservative

Compañía Chilena de Fósforos S.A. (SNSE:FOSFOROS) just reported healthy earnings but the stock price didn't move much. Investors are probably missing some underlying factors which are encouraging for the future of the company.

Check out our latest analysis for Compañía Chilena de Fósforos

How Do Unusual Items Influence Profit?

For anyone who wants to understand Compañía Chilena de Fósforos' profit beyond the statutory numbers, it's important to note that during the last twelve months statutory profit was reduced by CL$1.0b 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 that's hardly a surprise given these line items are considered unusual. If Compañía Chilena de Fósforos doesn't see those unusual expenses repeat, then all else being equal we'd expect its profit to increase over the coming year.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Compañía Chilena de Fósforos.

An Unusual Tax Situation

Just as we noted the unusual items, we must inform you that Compañía Chilena de Fósforos received a tax benefit which contributed CL$1.2b to the bottom line. This is of course a bit out of the ordinary, given it is more common for companies to be paying tax than receiving tax benefits! The receipt of a tax benefit is obviously a good thing, on its own. And since it previously lost money, it may well simply indicate the realisation of past tax losses. However, our data indicates that tax benefits can temporarily boost statutory profit in the year it is booked, but subsequently profit may fall back. In the likely event the tax benefit is not repeated, we'd expect to see its statutory profit levels drop, at least in the absence of strong growth.

Our Take On Compañía Chilena de Fósforos' Profit Performance

In the last year Compañía Chilena de Fósforos received a tax benefit, which boosted its profit in a way that might not be much more sustainable than turning prime farmland into gas fields. Having said that, it also had a unusual item reducing its profit. Based on these factors, it's hard to tell if Compañía Chilena de Fósforos' profits are a reasonable reflection of its underlying profitability. 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. When we did our research, we found 3 warning signs for Compañía Chilena de Fósforos (1 can't be ignored!) that we believe deserve your full attention.

Our examination of Compañía Chilena de Fósforos has focussed on certain factors that can make its earnings look better than they are. 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 with significant insider holdings to be useful.

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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.