Shaky Earnings May Not Tell The Whole Story For Hargreaves Services (LON:HSP)

The market shrugged off Hargreaves Services Plc's (LON:HSP) weak earnings report. While shares were up, we believe there are some factors in the earnings report that might cause investors some concerns.

Check out our latest analysis for Hargreaves Services

The Impact Of Unusual Items On Profit

For anyone who wants to understand Hargreaves Services' profit beyond the statutory numbers, it's important to note that during the last twelve months statutory profit gained from UK£4.7m worth of unusual items. We can't deny that higher profits generally leave us optimistic, but we'd prefer it if the profit were to be sustainable. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. Which is hardly surprising, given the name. Hargreaves Services had a rather significant contribution from unusual items relative to its profit to November 2023. All else being equal, this would likely have the effect of making the statutory profit a poor guide to 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.

An Unusual Tax Situation

Just as we noted the unusual items, we must inform you that Hargreaves Services received a tax benefit which contributed UK£1.3m to the bottom line. This is meaningful because companies usually pay tax rather than receive tax benefits. The receipt of a tax benefit is obviously a good thing, on its own. 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. 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 Hargreaves Services' Profit Performance

In its last report Hargreaves Services received a tax benefit which might make its profit look better than it really is on a underlying level. 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 Hargreaves Services' statutory profits might make it look better than it really is on an underlying level. If you'd like to know more about Hargreaves Services as a business, it's important to be aware of any risks it's facing. While conducting our analysis, we found that Hargreaves Services has 3 warning signs and it would be unwise to ignore these.

Our examination of Hargreaves Services 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. 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. 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. 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.