Are Arkema's (EPA:AKE) Statutory Earnings A Good Reflection Of Its Earnings Potential?

By
Simply Wall St
Published
February 02, 2021
ENXTPA:AKE
Source: Shutterstock

Many investors consider it preferable to invest in profitable companies over unprofitable ones, because profitability suggests a business is sustainable. That said, the current statutory profit is not always a good guide to a company's underlying profitability. In this article, we'll look at how useful this year's statutory profit is, when analysing Arkema (EPA:AKE).

It's good to see that over the last twelve months Arkema made a profit of €312.0m on revenue of €7.95b. In the last few years both its revenue and its profit have fallen, as you can see in the chart below.

Check out our latest analysis for Arkema

earnings-and-revenue-history
ENXTPA:AKE Earnings and Revenue History February 3rd 2021

Of course, when it comes to statutory profit, the devil is often in the detail, and we can get a better sense for a company by diving deeper into the financial statements. This article will discuss how unusual items have impacted Arkema's most recent profit results. 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

Importantly, our data indicates that Arkema's profit was reduced by €134m, due to unusual items, over the last year. While deductions due to unusual items are disappointing in the first instance, there is a silver lining. We looked at thousands of listed companies and found that unusual items are very often one-off in nature. And, after all, that's exactly what the accounting terminology implies. If Arkema doesn't see those unusual expenses repeat, then all else being equal we'd expect its profit to increase over the coming year.

Our Take On Arkema's Profit Performance

Unusual items (expenses) detracted from Arkema's earnings over the last year, but we might see an improvement next year. Based on this observation, we consider it likely that Arkema's statutory profit actually understates its earnings potential! On the other hand, its EPS actually shrunk in the last twelve months. 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 Arkema, you'd also look into what risks it is currently facing. In terms of investment risks, we've identified 3 warning signs with Arkema, and understanding them should be part of your investment process.

Today we've zoomed in on a single data point to better understand the nature of Arkema's profit. But there are plenty of other ways to inform your opinion of a company. Some people consider a high return on equity to be a good sign of a quality business. 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 that insiders are buying to be useful.

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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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