Solid Earnings May Not Tell The Whole Story For Livestock Improvement (NZSE:LIC)

Following the solid earnings report from Livestock Improvement Corporation Limited (NZSE:LIC), the market responded by bidding up the stock price. Despite this, our analysis suggests that there are some factors weakening the foundations of those good profit numbers.

Check out our latest analysis for Livestock Improvement

How Do Unusual Items Influence Profit?

Importantly, our data indicates that Livestock Improvement's profit received a boost of NZ$4.5m in unusual items, over the last year. While it's always nice to have higher profit, a large contribution from unusual items sometimes dampens our enthusiasm. We ran the numbers on most publicly listed companies worldwide, and it's very common for unusual items to be once-off in nature. And, after all, that's exactly what the accounting terminology implies. Assuming those unusual items don't show up again in the current year, we'd thus expect profit to be weaker next year (in the absence of business growth, that is).

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Livestock Improvement.

Our Take On Livestock Improvement's Profit Performance

Arguably, Livestock Improvement's statutory earnings have been distorted by unusual items boosting profit. Therefore, it seems possible to us that Livestock Improvement's true underlying earnings power is actually less than its statutory profit. The silver lining is that its EPS growth over the last year has been really wonderful, even if it's not a perfect measure. 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. So while earnings quality is important, it's equally important to consider the risks facing Livestock Improvement at this point in time. To help with this, we've discovered 4 warning signs (2 are concerning!) that you ought to be aware of before buying any shares in Livestock Improvement.

This note has only looked at a single factor that sheds light on the nature of Livestock Improvement'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. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.