We're Not Counting On Fonterra Co-operative Group (NZSE:FCG) To Sustain Its Statutory Profitability

As a general rule, we think profitable companies are less risky than companies that lose money. However, sometimes companies receive a one-off boost (or reduction) to their profit, and it's not always clear whether statutory profits are a good guide, going forward. Today we'll focus on whether this year's statutory profits are a good guide to understanding Fonterra Co-operative Group (NZSE:FCG).

It's good to see that over the last twelve months Fonterra Co-operative Group made a profit of NZ$830.0m on revenue of NZ$20.3b.

See our latest analysis for Fonterra Co-operative Group

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. This article will focus on the impact unusual items have had on Fonterra Co-operative Group's statutory earnings. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Fonterra Co-operative Group.

The Impact Of Unusual Items On Profit

Importantly, our data indicates that Fonterra Co-operative Group's profit received a boost of NZ$425m in unusual items, over the last year. We can't deny that higher profits generally leave us optimistic, but we'd prefer it if the profit were to be sustainable. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. Which is hardly surprising, given the name. We can see that Fonterra Co-operative Group's positive unusual items were quite significant relative to its profit in the year to July 2020. As a result, we can surmise that the unusual items are making its statutory profit significantly stronger than it would otherwise be.

Our Take On Fonterra Co-operative Group's Profit Performance

As we discussed above, we think the significant positive unusual item makes Fonterra Co-operative Group'searnings a poor guide to its underlying profitability. As a result, we think it may well be the case that Fonterra Co-operative Group's underlying earnings power is lower than its statutory profit. On the bright side, the company showed enough improvement to book a profit this year, after losing money last year. The goal of this article has been to assess how well we can rely on the statutory earnings to reflect the company's potential, but there is plenty more to consider. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. Be aware that Fonterra Co-operative Group is showing 3 warning signs in our investment analysis and 2 of those are a bit concerning...

Today we've zoomed in on a single data point to better understand the nature of Fonterra Co-operative Group's 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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