Here’s Why Dixons Carphone’s (LON:DC.) Statutory Earnings Are Arguably Too Conservative

It might be old fashioned, but we really like to invest in companies that make a profit, each and every year. 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. In this article, we’ll look at how useful this year’s statutory profit is, when analysing Dixons Carphone (LON:DC.).

While Dixons Carphone was able to generate revenue of UK£10.3b in the last twelve months, we think its profit result of UK£79.0m was more important.

See our latest analysis for Dixons Carphone

LSE:DC. Income Statement, December 14th 2019
LSE:DC. Income Statement, December 14th 2019

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 Dixons Carphone’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 Dixons Carphone’s profit was reduced by UK£481m, 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. 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. Dixons Carphone took a rather significant hit from unusual items in the year to October 2019. All else being equal, this would likely have the effect of making the statutory profit look worse than its underlying earnings power.

Our Take On Dixons Carphone’s Profit Performance

As we discussed above, we think the significant unusual expense will make Dixons Carphone’s statutory profit lower than it would otherwise have been. Based on this observation, we consider it possible that Dixons Carphone’s statutory profit actually understates its earnings potential! And one can definitely find a positive in the fact that it made a profit this year, despite losing money 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. While it’s really important to consider how well a company’s statutory earnings represent its true earnings power, it’s also worth taking a look at what analysts are forecasting for the future. At Simply Wall St, we have analyst estimates which you can view by clicking here.

Today we’ve zoomed in on a single data point to better understand the nature of Dixons Carphone’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. 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.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.