We Wouldn't Rely On Delek Automotive Systems's (TLV:DLEA) Statutory Earnings As A Guide

Statistically speaking, it is less risky to invest in profitable companies than in unprofitable ones. 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 Delek Automotive Systems (TLV:DLEA).

It's good to see that over the last twelve months Delek Automotive Systems made a profit of ₪284.0m on revenue of ₪3.27b. As you can see below, its profit has actually declined over the last three years, even though its revenue was flat.

Check out our latest analysis for Delek Automotive Systems

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 focus on the impact unusual items have had on Delek Automotive Systems' statutory earnings. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Delek Automotive Systems.

The Impact Of Unusual Items On Profit

For anyone who wants to understand Delek Automotive Systems' profit beyond the statutory numbers, it's important to note that during the last twelve months statutory profit gained from ₪107m worth of unusual items. While we like to see profit increases, we tend to be a little more cautious when unusual items have made a big contribution. 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 Delek Automotive Systems' positive unusual items were quite significant relative to its profit in the year to June 2020. As a result, we can surmise that the unusual items are making its statutory profit significantly stronger than it would otherwise be.

Our Take On Delek Automotive Systems' Profit Performance

As we discussed above, we think the significant positive unusual item makes Delek Automotive Systems'earnings a poor guide to its underlying profitability. For this reason, we think that Delek Automotive Systems' statutory profits may be a bad guide to its underlying earnings power, and might give investors an overly positive impression of the company. The silver lining is that its EPS growth over the last year has been really wonderful, even if it's not a perfect measure. The goal of this article has been to assess how well we can rely on the statutory earnings to reflect the company's potential, but there is plenty more to consider. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. Be aware that Delek Automotive Systems is showing 4 warning signs in our investment analysis and 2 of those are concerning...

This note has only looked at a single factor that sheds light on the nature of Delek Automotive Systems' profit. But there is always more to discover if you are capable of focussing your mind on minutiae. For example, many people consider a high return on equity as an indication of favorable business economics, while others like to 'follow the money' and search out stocks that insiders are buying. 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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