Should You Use Victrex's (LON:VCT) Statutory Earnings To Analyse It?

Broadly speaking, profitable businesses are less risky than unprofitable ones. That said, the current statutory profit is not always a good guide to a company's underlying profitability. This article will consider whether Victrex's (LON:VCT) statutory profits are a good guide to its underlying earnings.

While Victrex was able to generate revenue of UK£266.0m in the last twelve months, we think its profit result of UK£54.2m was more important. The chart below shows that both revenue and profit have declined over the last three years.

See our latest analysis for Victrex

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 Victrex'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.

The Impact Of Unusual Items On Profit

To properly understand Victrex's profit results, we need to consider the UK£12m expense attributed 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 Victrex to produce a higher profit next year, all else being equal.

Our Take On Victrex's Profit Performance

Because unusual items detracted from Victrex's earnings over the last year, you could argue that we can expect an improved result in the current quarter. Because of this, we think Victrex's earnings potential is at least as good as it seems, and maybe even better! 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. So while earnings quality is important, it's equally important to consider the risks facing Victrex at this point in time. In terms of investment risks, we've identified 2 warning signs with Victrex, and understanding them should be part of your investment process.

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