Stock Analysis

Are Sanford's (NZSE:SAN) Statutory Earnings A Good Reflection Of Its Earnings Potential?

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NZSE:SAN
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Many investors consider it preferable to invest in profitable companies over unprofitable ones, because profitability suggests a business is sustainable. 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 Sanford (NZSE:SAN).

It's good to see that over the last twelve months Sanford made a profit of NZ$22.4m on revenue of NZ$468.8m. As you can see below, its profit has actually declined over the last three years, even though its revenue was flat.

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NZSE:SAN Earnings and Revenue History December 2nd 2020

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 discuss how unusual items have impacted Sanford's most recent profit results. 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.

How Do Unusual Items Influence Profit?

To properly understand Sanford's profit results, we need to consider the NZ$5.4m gain attributed to unusual items. While we like to see profit increases, we tend to be a little more cautious when unusual items have made a big contribution. We ran the numbers on most publicly listed companies worldwide, and it's very common for unusual items to be once-off in nature. Which is hardly surprising, given the name. If Sanford doesn't see that contribution repeat, then all else being equal we'd expect its profit to drop over the current year.

Our Take On Sanford's Profit Performance

Arguably, Sanford's statutory earnings have been distorted by unusual items boosting profit. Therefore, it seems possible to us that Sanford's true underlying earnings power is actually less than its statutory profit. In further bad news, its earnings per share decreased in the last year. 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. So if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. Case in point: We've spotted 2 warning signs for Sanford you should be aware of.

This note has only looked at a single factor that sheds light on the nature of Sanford's profit. But there are plenty of other ways to inform your opinion of a company. 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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