Some Investors May Be Willing To Look Past Fertilisers and Chemicals Travancore's (NSE:FACT) Soft Earnings

Shareholders appeared unconcerned with The Fertilisers and Chemicals Travancore Limited's (NSE:FACT) lackluster earnings report last week. Our analysis suggests that while the profits are soft, the foundations of the business are strong.

View our latest analysis for Fertilisers and Chemicals Travancore

The Impact Of Unusual Items On Profit

To properly understand Fertilisers and Chemicals Travancore's profit results, we need to consider the ₹2.5b expense attributed to unusual items. It's never great to see unusual items costing the company profits, but on the upside, things might improve sooner rather than later. 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. Fertilisers and Chemicals Travancore took a rather significant hit from unusual items in the year to March 2024. All else being equal, this would likely have the effect of making the statutory profit look worse than its underlying earnings power.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Fertilisers and Chemicals Travancore.

An Unusual Tax Situation

Just as we noted the unusual items, we must inform you that Fertilisers and Chemicals Travancore received a tax benefit which contributed ₹1.0b 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. Of course, prima facie it's great to receive a tax benefit. However, the devil in the detail is that these kind of benefits only impact in the year they are booked, and are often one-off in nature. In the likely event the tax benefit is not repeated, we'd expect to see its statutory profit levels drop, at least in the absence of strong growth. 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.

Our Take On Fertilisers and Chemicals Travancore's Profit Performance

In its last report Fertilisers and Chemicals Travancore received a tax benefit which might make its profit look better than it really is on a underlying level. But on the other hand, it also saw an unusual item depress its profit. Considering all the aforementioned, we'd venture that Fertilisers and Chemicals Travancore's profit result is a pretty good guide to its true profitability, albeit a bit on the conservative side. If you want to do dive deeper into Fertilisers and Chemicals Travancore, you'd also look into what risks it is currently facing. Every company has risks, and we've spotted 2 warning signs for Fertilisers and Chemicals Travancore you should know about.

In this article we've looked at a number of factors that can impair the utility of profit numbers, as a guide to a business. 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 with high insider ownership.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.