Does Lotte Chemical Titan Holding Berhad's (KLSE:LCTITAN) Statutory Profit Adequately Reflect Its Underlying Profit?

Statistically speaking, it is less risky to invest in profitable companies than in 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. This article will consider whether Lotte Chemical Titan Holding Berhad's (KLSE:LCTITAN) statutory profits are a good guide to its underlying earnings.

It's good to see that over the last twelve months Lotte Chemical Titan Holding Berhad made a profit of RM185.2m on revenue of RM6.95b. Below, you can see that both its revenue and its profit have fallen over the last three years.

View our latest analysis for Lotte Chemical Titan Holding Berhad

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. As a reuslt, we think it's important to consider how unusual items and the recent tax benefit have influenced Lotte Chemical Titan Holding Berhad's statutory profit. That might leave you wondering what analysts are forecasting in terms of future profitability. Luckily, you can click here to see an interactive graph depicting future profitability, based on their estimates.

The Impact Of Unusual Items On Profit

Importantly, our data indicates that Lotte Chemical Titan Holding Berhad's profit was reduced by RM15m, 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 that's hardly a surprise given these line items are considered unusual. Assuming those unusual expenses don't come up again, we'd therefore expect Lotte Chemical Titan Holding Berhad to produce a higher profit next year, all else being equal.

An Unusual Tax Situation

Having already discussed the impact of the unusual items, we should also note that Lotte Chemical Titan Holding Berhad received a tax benefit of RM50m. This is meaningful because companies usually pay tax rather than receive tax benefits. We're sure the company was pleased with its 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 Lotte Chemical Titan Holding Berhad's Profit Performance

In the last year Lotte Chemical Titan Holding Berhad 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. Based on these factors, we think it's very unlikely that Lotte Chemical Titan Holding Berhad's statutory profits make it seem much weaker than it is. So while earnings quality is important, it's equally important to consider the risks facing Lotte Chemical Titan Holding Berhad at this point in time. At Simply Wall St, we found 2 warning signs for Lotte Chemical Titan Holding Berhad and we think they deserve your attention.

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 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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