We Think Selan Exploration Technology's (NSE:SELAN) Statutory Profit Might Understate Its Earnings Potential

It might be old fashioned, but we really like to invest in companies that make a profit, each and every year. However, sometimes companies receive a one-off boost (or reduction) to their profit, and it's not always clear whether statutory profits are a good guide, going forward. Today we'll focus on whether this year's statutory profits are a good guide to understanding Selan Exploration Technology (NSE:SELAN).

It's good to see that over the last twelve months Selan Exploration Technology made a profit of ₹86.6m on revenue of ₹660.4m. As you can see in the chart below, its profit has declined over the last three years, even though its revenue has increased.

View our latest analysis for Selan Exploration Technology

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 Selan Exploration Technology's most recent profit results. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Selan Exploration Technology.

How Do Unusual Items Influence Profit?

Importantly, our data indicates that Selan Exploration Technology's profit was reduced by ₹99m, 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. We looked at thousands of listed companies and found that unusual items are very often one-off in nature. And, after all, that's exactly what the accounting terminology implies. Selan Exploration Technology took a rather significant hit from unusual items in the year to September 2020. As a result, we can surmise that the unusual items made its statutory profit significantly weaker than it would otherwise be.

Our Take On Selan Exploration Technology's Profit Performance

As we mentioned previously, the Selan Exploration Technology's profit was hampered by unusual items in the last year. Because of this, we think Selan Exploration Technology's underlying earnings potential is as good as, or possibly even better, than the statutory profit makes it seem! Unfortunately, though, its earnings per share actually fell back over the 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. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. In terms of investment risks, we've identified 5 warning signs with Selan Exploration Technology, and understanding them should be part of your investment process.

This note has only looked at a single factor that sheds light on the nature of Selan Exploration Technology'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. 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.

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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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