Are Steel Exchange India's (NSE:STEELXIND) Statutory Earnings A Good Reflection Of Its Earnings Potential?

Broadly speaking, profitable businesses are less risky than unprofitable ones. Having said that, sometimes statutory profit levels are not a good guide to ongoing profitability, because some short term one-off factor has impacted profit levels. Today we'll focus on whether this year's statutory profits are a good guide to understanding Steel Exchange India (NSE:STEELXIND).

We like the fact that Steel Exchange India made a profit of ₹503.2m on its revenue of ₹6.86b, in the last year. The chart below shows that while revenue has fallen over the last three years, the company has moved from unprofitable to profitable.

View our latest analysis for Steel Exchange India

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. As a reuslt, we think it's important to consider how unusual items and the recent tax benefit have influenced Steel Exchange India's statutory profit. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Steel Exchange India.

How Do Unusual Items Influence Profit?

Importantly, our data indicates that Steel Exchange India's profit was reduced by ₹116m, 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. 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. Assuming those unusual expenses don't come up again, we'd therefore expect Steel Exchange India to produce a higher profit next year, all else being equal.

An Unusual Tax Situation

Just as we noted the unusual items, we must inform you that Steel Exchange India received a tax benefit which contributed ₹251m 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. 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. 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.

Our Take On Steel Exchange India's Profit Performance

In its last report Steel Exchange India 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, we think it's very unlikely that Steel Exchange India's statutory profits make it seem much weaker than it is. If you want to do dive deeper into Steel Exchange India, you'd also look into what risks it is currently facing. For example, we've found that Steel Exchange India has 4 warning signs (1 is potentially serious!) that deserve your attention before going any further with your analysis.

Our examination of Steel Exchange India has focussed on certain factors that can make its earnings look better than they are. But there is always more to discover if you are capable of focussing your mind on minutiae. 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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