We Wouldn't Rely On Zen Technologies's (NSE:ZENTEC) Statutory Earnings As A Guide

Many investors consider it preferable to invest in profitable companies over unprofitable ones, because profitability suggests a business is sustainable. 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 Zen Technologies (NSE:ZENTEC).

It's good to see that over the last twelve months Zen Technologies made a profit of ₹281.5m on revenue of ₹692.9m. Happily, it has grown both its profit and revenue over the last three years (but not in the last year), as you can see in the chart below.

View our latest analysis for Zen Technologies

Of course, it is only sensible to look beyond the statutory profits and question how well those numbers represent the sustainable earnings power of the business. Therefore, we think it makes sense to note and understand the impact that a tax benefit has had on Zen Technologies' statutory profit in the last twelve months. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Zen Technologies.

An Unusual Tax Situation

We can see that Zen Technologies received a tax benefit of ₹133m. 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! 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. 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.

Our Take On Zen Technologies' Profit Performance

In its most recent report, Zen Technologies disclosed a tax benefit, as we discussed above. Tax is usually an expense, not a benefit, so we don't think the reported profit number is a particularly good guide to the earning potential of the business. For this reason, we think that Zen Technologies' statutory profits may be a bad guide to its underlying earnings power, and might give investors an overly positive impression of the company. But on the bright side, its earnings per share have grown at an extremely impressive rate over the last three years. Of course, we've only just scratched the surface when it comes to analysing its earnings; one could also consider margins, forecast growth, and return on investment, among other factors. If you'd like to know more about Zen Technologies as a business, it's important to be aware of any risks it's facing. You'd be interested to know, that we found 3 warning signs for Zen Technologies and you'll want to know about these.

Today we've zoomed in on a single data point to better understand the nature of Zen Technologies' 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 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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