Here's Why We Don't Think Eimco Elecon (India)'s (NSE:EIMCOELECO) Statutory Earnings Reflect Its Underlying Earnings Potential

As a general rule, we think profitable companies are less risky than companies that lose money. That said, the current statutory profit is not always a good guide to a company's underlying profitability. Today we'll focus on whether this year's statutory profits are a good guide to understanding Eimco Elecon (India) (NSE:EIMCOELECO).

While Eimco Elecon (India) was able to generate revenue of ₹1.24b in the last twelve months, we think its profit result of ₹118.9m was more important. The chart below shows that both revenue and profit have declined over the last three years.

View our latest analysis for Eimco Elecon (India)

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 Eimco Elecon (India)'s statutory earnings. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Eimco Elecon (India).

The Impact Of Unusual Items On Profit

To properly understand Eimco Elecon (India)'s profit results, we need to consider the ₹92m gain attributed to 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 Eimco Elecon (India)'s positive unusual items were quite significant relative to its profit in the year to September 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 Eimco Elecon (India)'s Profit Performance

As previously mentioned, Eimco Elecon (India)'s large boost from unusual items won't be there indefinitely, so its statutory earnings are probably a poor guide to its underlying profitability. As a result, we think it may well be the case that Eimco Elecon (India)'s underlying earnings power is lower than its statutory profit. In further bad news, its earnings per share decreased in the last year. 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. If you want to do dive deeper into Eimco Elecon (India), you'd also look into what risks it is currently facing. Every company has risks, and we've spotted 5 warning signs for Eimco Elecon (India) (of which 1 is significant!) you should know about.

Today we've zoomed in on a single data point to better understand the nature of Eimco Elecon (India)'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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