Kanoria Chemicals & Industries' (NSE:KANORICHEM) Earnings Are Of Questionable Quality

Kanoria Chemicals & Industries Limited (NSE:KANORICHEM) announced strong profits, but the stock was stagnant. We did some digging, and we found some concerning factors in the details.

Check out our latest analysis for Kanoria Chemicals & Industries

How Do Unusual Items Influence Profit?

To properly understand Kanoria Chemicals & Industries' profit results, we need to consider the ₹38m expense attributed to unusual items. While deductions due to unusual items are disappointing in the first instance, there is a silver lining. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. And, after all, that's exactly what the accounting terminology implies. If Kanoria Chemicals & Industries doesn't see those unusual expenses repeat, then all else being equal we'd expect its profit to increase over the coming year.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Kanoria Chemicals & Industries.

An Unusual Tax Situation

Having already discussed the impact of the unusual items, we should also note that Kanoria Chemicals & Industries received a tax benefit of ₹46m. This is of course a bit out of the ordinary, given it is more common for companies to be paying tax than receiving tax benefits! We're sure the company was pleased with its tax benefit. And given that it lost money last year, it seems possible that the benefit is evidence that it now expects to find value in its past tax losses. 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. 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 Kanoria Chemicals & Industries' Profit Performance

In its last report Kanoria Chemicals & Industries 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. Based on these factors, it's hard to tell if Kanoria Chemicals & Industries' profits are a reasonable reflection of its underlying profitability. If you want to do dive deeper into Kanoria Chemicals & Industries, you'd also look into what risks it is currently facing. For instance, we've identified 4 warning signs for Kanoria Chemicals & Industries (1 is a bit unpleasant) you should be familiar with.

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. For example, many people consider a high return on equity as an indication of favorable business economics, while others like to 'follow the money' and search out stocks that insiders are buying. 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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