Are United Company RUSAL's (HKG:486) Statutory Earnings A Good Guide To Its Underlying Profitability?

It might be old fashioned, but we really like to invest in companies that make a profit, each and every year. 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. Today we'll focus on whether this year's statutory profits are a good guide to understanding United Company RUSAL (HKG:486).

It's good to see that over the last twelve months United Company RUSAL made a profit of US$211.0m on revenue of US$8.99b. The chart below shows that revenue has been flat over the last three years, while profit has actually declined.

View our latest analysis for United Company RUSAL

Not all profits are equal, and we can learn more about the nature of a company's past profitability by diving deeper into the financial statements. This article, will discuss how unusual items and a tax benefit have impacted United Company RUSAL's most recent bottom line 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 United Company RUSAL's profit was reduced by US$254m, due to unusual items, over the last year. It's never great to see unusual items costing the company profits, but on the upside, things might improve sooner rather than later. 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. United Company RUSAL took a rather significant hit from unusual items in the year to June 2020. As a result, we can surmise that the unusual items made its statutory profit significantly weaker than it would otherwise be.

An Unusual Tax Situation

Just as we noted the unusual items, we must inform you that United Company RUSAL received a tax benefit which contributed US$76m to the bottom line. This is meaningful because companies usually pay tax rather than receive tax benefits. Of course, prima facie it's great to receive a tax benefit. However, our data indicates that tax benefits can temporarily boost statutory profit in the year it is booked, but subsequently profit may fall back. Assuming the tax benefit is not repeated every year, we could see its profitability drop noticeably, all else being equal. While we think it's good that the company has booked a tax benefit, it does mean that there's every chance the statutory profit will come in a lot higher than it would be if the income was adjusted for one-off factors.

Our Take On United Company RUSAL's Profit Performance

In its last report United Company RUSAL received a tax benefit which might make its profit look better than it really is on a underlying level. Having said that, it also had a unusual item reducing its profit. Based on these factors, it's hard to tell if United Company RUSAL's profits are a reasonable reflection of its underlying profitability. So while earnings quality is important, it's equally important to consider the risks facing United Company RUSAL at this point in time. For instance, we've identified 4 warning signs for United Company RUSAL (1 is concerning) you should be familiar with.

In this article we've looked at a number of factors that can impair the utility of profit numbers, as a guide to a business. 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. 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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