Stock Analysis

Does Associated British Foods's (LON:ABF) Statutory Profit Adequately Reflect Its Underlying Profit?

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LSE:ABF
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Statistically speaking, it is less risky to invest in profitable companies than in unprofitable ones. However, sometimes companies receive a one-off boost (or reduction) to their profit, and it's not always clear whether statutory profits are a good guide, going forward. In this article, we'll look at how useful this year's statutory profit is, when analysing Associated British Foods (LON:ABF).

It's good to see that over the last twelve months Associated British Foods made a profit of UK£455.0m on revenue of UK£13.9b. The chart below shows that both revenue and profit have declined over the last three years.

Check out our latest analysis for Associated British Foods

earnings-and-revenue-history
LSE:ABF Earnings and Revenue History January 26th 2021

Importantly, statutory profits are not always the best tool for understanding a company's true earnings power, so it's well worth examining profits in a little more detail. This article will discuss how unusual items have impacted Associated British Foods' 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

For anyone who wants to understand Associated British Foods' profit beyond the statutory numbers, it's important to note that during the last twelve months statutory profit was reduced by UK£152m due to unusual items. It's never great to see unusual items costing the company profits, but on the upside, things might improve sooner rather than later. 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. Assuming those unusual expenses don't come up again, we'd therefore expect Associated British Foods to produce a higher profit next year, all else being equal.

Our Take On Associated British Foods' Profit Performance

Unusual items (expenses) detracted from Associated British Foods' earnings over the last year, but we might see an improvement next year. Because of this, we think Associated British Foods' earnings potential is at least as good as it seems, and maybe even better! Unfortunately, though, its earnings per share actually fell back 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. So if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. At Simply Wall St, we found 3 warning signs for Associated British Foods and we think they deserve your attention.

Today we've zoomed in on a single data point to better understand the nature of Associated British Foods' 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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