We Wouldn't Rely On Graphite India's (NSE:GRAPHITE) Statutory Earnings As A Guide

Many investors consider it preferable to invest in profitable companies over unprofitable ones, because profitability suggests a business is sustainable. 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. This article will consider whether Graphite India's (NSE:GRAPHITE) statutory profits are a good guide to its underlying earnings.

We like the fact that Graphite India made a profit of ₹449.6m on its revenue of ₹30.9b, in the last year. The chart below shows how it has grown revenue over the last three years, but that profit has declined.

View our latest analysis for Graphite India

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 Graphite India'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.

How Do Unusual Items Influence Profit?

Importantly, our data indicates that Graphite India's profit received a boost of ₹620m in unusual items, over the last year. We can't deny that higher profits generally leave us optimistic, but we'd prefer it if the profit were to be sustainable. 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. And that's as you'd expect, given these boosts are described as 'unusual'. We can see that Graphite India's positive unusual items were quite significant relative to its profit in the year to March 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 Graphite India's Profit Performance

As we discussed above, we think the significant positive unusual item makes Graphite India'searnings a poor guide to its underlying profitability. As a result, we think it may well be the case that Graphite India's underlying earnings power is lower than its statutory profit. In further bad news, its earnings per share decreased in the 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. If you want to do dive deeper into Graphite India, you'd also look into what risks it is currently facing. While conducting our analysis, we found that Graphite India has 3 warning signs and it would be unwise to ignore these.

This note has only looked at a single factor that sheds light on the nature of Graphite India's profit. But there are plenty of other ways to inform your opinion of a company. 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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