The Strong Earnings Posted By BASF (ETR:BAS) Are A Good Indication Of The Strength Of The Business

BASF SE (ETR:BAS) just reported healthy earnings but the stock price didn't move much. Our analysis suggests that investors might be missing some promising details.

View our latest analysis for BASF

The Impact Of Unusual Items On Profit

For anyone who wants to understand BASF's profit beyond the statutory numbers, it's important to note that during the last twelve months statutory profit was reduced by €3.5b 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. BASF took a rather significant hit from unusual items in the year to June 2021. All else being equal, this would likely have the effect of making the statutory profit look worse than its underlying earnings power.

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 BASF's Profit Performance

As we discussed above, we think the significant unusual expense will make BASF's statutory profit lower than it would otherwise have been. Based on this observation, we consider it possible that BASF's statutory profit actually understates its earnings potential! And on top of that, its earnings per share have grown at an extremely impressive rate over the last year. 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 BASF, you'd also look into what risks it is currently facing. Case in point: We've spotted 3 warning signs for BASF you should be aware of.

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