Cheviot's (NSE:CHEVIOT) Solid Earnings May Rest On Weak Foundations

The recent earnings posted by Cheviot Company Limited (NSE:CHEVIOT) were solid, but the stock didn't move as much as we expected. We believe that shareholders have noticed some concerning factors beyond the statutory profit numbers.

View our latest analysis for Cheviot

How Do Unusual Items Influence Profit?

For anyone who wants to understand Cheviot's profit beyond the statutory numbers, it's important to note that during the last twelve months statutory profit gained from ₹124m 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. We ran the numbers on most publicly listed companies worldwide, and it's very common for unusual items to be once-off in nature. And, after all, that's exactly what the accounting terminology implies. Assuming those unusual items don't show up again in the current year, we'd thus expect profit to be weaker next year (in the absence of business growth, that is).

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Cheviot.

Our Take On Cheviot's Profit Performance

We'd posit that Cheviot's statutory earnings aren't a clean read on ongoing productivity, due to the large unusual item. Because of this, we think that it may be that Cheviot's statutory profits are better than its underlying earnings power. Nonetheless, it's still worth noting that its earnings per share have grown at 64% over the last three years. 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'd like to know more about Cheviot as a business, it's important to be aware of any risks it's facing. Our analysis shows 2 warning signs for Cheviot (1 is significant!) and we strongly recommend you look at them before investing.

This note has only looked at a single factor that sheds light on the nature of Cheviot'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. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.