We Think You Should Be Aware Of Some Concerning Factors In Indo Rama Synthetics (India)'s (NSE:INDORAMA) Earnings

The stock price didn't jump after Indo Rama Synthetics (India) Limited (NSE:INDORAMA) posted decent earnings last week. We think that investors might be worried about some concerning underlying factors.

Check out our latest analysis for Indo Rama Synthetics (India)

How Do Unusual Items Influence Profit?

Importantly, our data indicates that Indo Rama Synthetics (India)'s profit was reduced by ₹116m, due to unusual items, over the last year. While deductions due to unusual items are disappointing in the first instance, there is a silver lining. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. And that's hardly a surprise given these line items are considered unusual. If Indo Rama Synthetics (India) doesn't see those unusual expenses repeat, then all else being equal we'd expect its profit to increase over the coming year.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Indo Rama Synthetics (India).

An Unusual Tax Situation

Just as we noted the unusual items, we must inform you that Indo Rama Synthetics (India) received a tax benefit which contributed ₹1.1b to the bottom line. This is of course a bit out of the ordinary, given it is more common for companies to be paying tax than receiving tax benefits! The receipt of a tax benefit is obviously a good thing, on its own. And given that it lost money last year, it seems possible that the benefit is evidence that it now expects to find value in its past tax losses. However, our data indicates that tax benefits can temporarily boost statutory profit in the year it is booked, but subsequently profit may fall back. In the likely event the tax benefit is not repeated, we'd expect to see its statutory profit levels drop, at least in the absence of strong growth. 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 Indo Rama Synthetics (India)'s Profit Performance

In the last year Indo Rama Synthetics (India) received a tax benefit, which boosted its profit in a way that might not be much more sustainable than turning prime farmland into gas fields. But on the other hand, it also saw an unusual item depress its profit. Based on these factors, we think it's very unlikely that Indo Rama Synthetics (India)'s statutory profits make it seem much weaker than it is. If you want to do dive deeper into Indo Rama Synthetics (India), you'd also look into what risks it is currently facing. Be aware that Indo Rama Synthetics (India) is showing 3 warning signs in our investment analysis and 1 of those is potentially serious...

Our examination of Indo Rama Synthetics (India) has focussed on certain factors that can make its earnings look better than they are. 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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