Shareholders Shouldn’t Be Too Comfortable With Corero Network Security's (LON:CNS) Strong Earnings

By
Simply Wall St
Published
May 09, 2022
AIM:CNS
Source: Shutterstock

Even though Corero Network Security plc (LON:CNS) posted strong earnings recently, the stock hasn't reacted in a large way. We decided to have a deeper look, and we believe that investors might be worried about several concerning factors that we found.

See our latest analysis for Corero Network Security

earnings-and-revenue-history
AIM:CNS Earnings and Revenue History May 9th 2022

The Impact Of Unusual Items On Profit

Importantly, our data indicates that Corero Network Security's profit received a boost of US$637k in unusual items, over the last year. While it's always nice to have higher profit, a large contribution from unusual items sometimes dampens our enthusiasm. When we crunched the numbers on thousands of publicly listed companies, we found that a boost from unusual items in a given year is often not repeated the next year. Which is hardly surprising, given the name. We can see that Corero Network Security's positive unusual items were quite significant relative to its profit in the year to December 2021. As a result, we can surmise that the unusual items are making its statutory profit significantly stronger than it would otherwise be.

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

Having already discussed the impact of the unusual items, we should also note that Corero Network Security received a tax benefit of US$149k. This is of course a bit out of the ordinary, given it is more common for companies to be paying tax than receiving tax benefits! We're sure the company was pleased with its tax benefit. And since it previously lost money, it may well simply indicate the realisation of past tax losses. 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 Corero Network Security's Profit Performance

In the last year Corero Network Security received a tax benefit, which boosted its profit in a way that might not be much more sustainable than turning prime farmland into gas fields. And on top of that, it also saw an unusual item boost its profit, suggesting that next year might see a lower profit number, if these events are not repeated. For the reasons mentioned above, we think that a perfunctory glance at Corero Network Security's statutory profits might make it look better than it really is on an underlying level. If you'd like to know more about Corero Network Security as a business, it's important to be aware of any risks it's facing. For example, Corero Network Security has 3 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.

Our examination of Corero Network Security 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. 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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