Ambuja Cements' (NSE:AMBUJACEM) Earnings Are Of Questionable Quality

Ambuja Cements Limited's (NSE:AMBUJACEM) robust earnings report didn't manage to move the market for its stock. We did some digging, and we found some concerning factors in the details.

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An Unusual Tax Situation

We can see that Ambuja Cements received a tax benefit of ₹8.8b. This is meaningful because companies usually pay tax rather than receive tax benefits. We're sure the company was pleased with its tax benefit. However, our data indicates that tax benefits can temporarily boost statutory profit in the year it is booked, but subsequently profit may fall back. Assuming the tax benefit is not repeated every year, we could see its profitability drop noticeably, all else being equal. So while we think it's great to receive a tax benefit, it does tend to imply an increased risk that the statutory profit overstates the sustainable earnings power of the business.

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.

Our Take On Ambuja Cements' Profit Performance

Ambuja Cements reported that it received a tax benefit, rather than paid tax, in its last report. As a result we don't think its profit result, which includes that tax-boost, is a good guide to its sustainable profit levels. Therefore, it seems possible to us that Ambuja Cements' true underlying earnings power is actually less than its statutory profit. But on the bright side, its earnings per share have grown at an extremely impressive rate over the last three years. 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 if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. Case in point: We've spotted 1 warning sign for Ambuja Cements you should be aware of.

This note has only looked at a single factor that sheds light on the nature of Ambuja Cements' 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 with high insider ownership.

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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.