Are Chemfab Alkalis's (NSE:CHEMFAB) Statutory Earnings A Good Guide To Its Underlying Profitability?

It might be old fashioned, but we really like to invest in companies that make a profit, each and every year. That said, the current statutory profit is not always a good guide to a company's underlying profitability. In this article, we'll look at how useful this year's statutory profit is, when analysing Chemfab Alkalis (NSE:CHEMFAB).

It's good to see that over the last twelve months Chemfab Alkalis made a profit of ₹96.4m on revenue of ₹1.76b. The chart below shows how it has grown revenue over the last three years, but that profit has declined.

See our latest analysis for Chemfab Alkalis

Not all profits are equal, and we can learn more about the nature of a company's past profitability by diving deeper into the financial statements. This article, will discuss how unusual items and a tax benefit have impacted Chemfab Alkalis' most recent bottom line results. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Chemfab Alkalis.

How Do Unusual Items Influence Profit?

For anyone who wants to understand Chemfab Alkalis' profit beyond the statutory numbers, it's important to note that during the last twelve months statutory profit was reduced by ₹68m due to unusual items. 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 that's hardly a surprise given these line items are considered unusual. In the twelve months to September 2020, Chemfab Alkalis had a big unusual items expense. All else being equal, this would likely have the effect of making the statutory profit look worse than its underlying earnings power.

An Unusual Tax Situation

Just as we noted the unusual items, we must inform you that Chemfab Alkalis received a tax benefit which contributed ₹48m to the bottom line. It's always a bit noteworthy when a company is paid by the tax man, rather than paying the tax man. 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. 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 Chemfab Alkalis' Profit Performance

In the last year Chemfab Alkalis 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. Considering all the aforementioned, we'd venture that Chemfab Alkalis' profit result is a pretty good guide to its true profitability, albeit a bit on the conservative side. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. For example, we've discovered 5 warning signs that you should run your eye over to get a better picture of Chemfab Alkalis.

Our examination of Chemfab Alkalis 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. 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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