Are McCarthy & Stone's (LON:MCS) Statutory Earnings A Good Reflection Of Its Earnings Potential?

Statistically speaking, it is less risky to invest in profitable companies than in unprofitable ones. 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. Today we'll focus on whether this year's statutory profits are a good guide to understanding McCarthy & Stone (LON:MCS).

While McCarthy & Stone was able to generate revenue of UK£621.4m in the last twelve months, we think its profit result of UK£30.1m was more important. In the last few years its profit has fallen, although its revenue was steady, as you can see in the chart below.

View our latest analysis for McCarthy & Stone

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. This article will focus on the impact unusual items have had on McCarthy & Stone's statutory earnings. 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 McCarthy & Stone's profit beyond the statutory numbers, it's important to note that during the last twelve months statutory profit was reduced by UK£10m due to unusual items. 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. Assuming those unusual expenses don't come up again, we'd therefore expect McCarthy & Stone to produce a higher profit next year, all else being equal.

Our Take On McCarthy & Stone's Profit Performance

Unusual items (expenses) detracted from McCarthy & Stone's earnings over the last year, but we might see an improvement next year. Based on this observation, we consider it likely that McCarthy & Stone's statutory profit actually understates its earnings potential! Unfortunately, though, its earnings per share actually fell back over the last year. At the end of the day, it's essential to consider more than just the factors above, if you want to understand the company properly. If you want to do dive deeper into McCarthy & Stone, you'd also look into what risks it is currently facing. In terms of investment risks, we've identified 1 warning sign with McCarthy & Stone, and understanding this should be part of your investment process.

This note has only looked at a single factor that sheds light on the nature of McCarthy & Stone'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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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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