Suryalakshmi Cotton Mills' (NSE:SURYALAXMI) Earnings Are Of Questionable Quality

Suryalakshmi Cotton Mills Limited's (NSE:SURYALAXMI) robust earnings report didn't manage to move the market for its stock. Our analysis suggests that shareholders have noticed something concerning in the numbers.

Check out our latest analysis for Suryalakshmi Cotton Mills

The Impact Of Unusual Items On Profit

Importantly, our data indicates that Suryalakshmi Cotton Mills' profit received a boost of ₹165m in unusual items, over the last year. While it's always nice to have higher profit, a large contribution from unusual items sometimes dampens our enthusiasm. 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'. Suryalakshmi Cotton Mills had a rather significant contribution from unusual items relative to its profit to September 2021. All else being equal, this would likely have the effect of making the statutory profit a poor guide to underlying earnings power.

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

Our Take On Suryalakshmi Cotton Mills' Profit Performance

As we discussed above, we think the significant positive unusual item makes Suryalakshmi Cotton Mills' earnings a poor guide to its underlying profitability. For this reason, we think that Suryalakshmi Cotton Mills' statutory profits may be a bad guide to its underlying earnings power, and might give investors an overly positive impression of the company. On the bright side, the company showed enough improvement to book a profit this year, after losing money 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. So while earnings quality is important, it's equally important to consider the risks facing Suryalakshmi Cotton Mills at this point in time. For example, Suryalakshmi Cotton Mills has 4 warning signs (and 2 which are a bit unpleasant) we think you should know about.

Today we've zoomed in on a single data point to better understand the nature of Suryalakshmi Cotton Mills' 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. While it might take a little research on your behalf, you may find this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying to be useful.

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.

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