We Wouldn't Rely On IBU-tec advanced materials' (ETR:IBU) Statutory Earnings As A Guide

Many investors consider it preferable to invest in profitable companies over unprofitable ones, because profitability suggests a business is sustainable. 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. In this article, we'll look at how useful this year's statutory profit is, when analysing IBU-tec advanced materials (ETR:IBU).

While IBU-tec advanced materials was able to generate revenue of €35.3m in the last twelve months, we think its profit result of €1.75m was more important.

See our latest analysis for IBU-tec advanced materials

Of course, it is only sensible to look beyond the statutory profits and question how well those numbers represent the sustainable earnings power of the business. As a reuslt, we think it's important to consider how unusual items and the recent tax benefit have influenced IBU-tec advanced materials' statutory profit. 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.

How Do Unusual Items Influence Profit?

For anyone who wants to understand IBU-tec advanced materials' profit beyond the statutory numbers, it's important to note that during the last twelve months statutory profit gained from €752k worth of unusual items. While it's always nice to have higher profit, a large contribution from unusual items sometimes dampens our enthusiasm. We ran the numbers on most publicly listed companies worldwide, and it's very common for unusual items to be once-off in nature. And, after all, that's exactly what the accounting terminology implies. IBU-tec advanced materials had a rather significant contribution from unusual items relative to its profit to June 2020. All else being equal, this would likely have the effect of making the statutory profit a poor guide to underlying earnings power.

An Unusual Tax Situation

Having already discussed the impact of the unusual items, we should also note that IBU-tec advanced materials received a tax benefit of €249k. This is meaningful because companies usually pay tax rather than receive tax benefits. Of course, prima facie it's great to receive a tax benefit. However, the devil in the detail is that these kind of benefits only impact in the year they are booked, and are often one-off in nature. Assuming the tax benefit is not repeated every year, we could see its profitability drop noticeably, all else being equal. While we think it's good that the company has booked a tax benefit, it does mean that there's every chance the statutory profit will come in a lot higher than it would be if the income was adjusted for one-off factors.

Our Take On IBU-tec advanced materials' Profit Performance

In the last year IBU-tec advanced materials 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. Furthermore, it also benefitted from a positive unusual item, which boosted the profit result even higher. For the reasons mentioned above, we think that a perfunctory glance at IBU-tec advanced materials' statutory profits might make it look better than it really is on an underlying level. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. For example, IBU-tec advanced materials has 3 warning signs (and 1 which is a bit concerning) we think you should know about.

Our examination of IBU-tec advanced materials has focussed on certain factors that can make its earnings look better than they are. And, on that basis, we are somewhat skeptical. 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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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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