Does S.P. Apparels's (NSE:SPAL) Statutory Profit Adequately Reflect Its Underlying Profit?

Statistically speaking, it is less risky to invest in profitable companies than in unprofitable ones. That said, the current statutory profit is not always a good guide to a company's underlying profitability. This article will consider whether S.P. Apparels' (NSE:SPAL) statutory profits are a good guide to its underlying earnings.

While S.P. Apparels was able to generate revenue of ₹5.96b in the last twelve months, we think its profit result of ₹176.7m was more important. The chart below shows that both revenue and profit have declined over the last three years.

Check out our latest analysis for S.P. Apparels

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 S.P. Apparels' statutory earnings. 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.

The Impact Of Unusual Items On Profit

To properly understand S.P. Apparels' profit results, we need to consider the ₹106m expense attributed to unusual items. 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 S.P. Apparels doesn't see those unusual expenses repeat, then all else being equal we'd expect its profit to increase over the coming year.

Our Take On S.P. Apparels' Profit Performance

Unusual items (expenses) detracted from S.P. Apparels' earnings over the last year, but we might see an improvement next year. Because of this, we think S.P. Apparels' earnings potential is at least as good as it seems, and maybe even better! Unfortunately, though, its earnings per share actually fell back over 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. So while earnings quality is important, it's equally important to consider the risks facing S.P. Apparels at this point in time. At Simply Wall St, we found 4 warning signs for S.P. Apparels and we think they deserve your attention.

Today we've zoomed in on a single data point to better understand the nature of S.P. Apparels' profit. But there are plenty of other ways to inform your opinion of a company. 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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