Why Seco/Warwick's (WSE:SWG) Shaky Earnings Are Just The Beginning Of Its Problems

The market rallied behind Seco/Warwick S.A.'s (WSE:SWG) stock, leading do a rise in the share price after its recent weak earnings report. Sometimes, shareholders are willing to ignore soft numbers with the hope that they will improve, but our analysis suggests this is unlikely for Seco/Warwick.

View our latest analysis for Seco/Warwick

An Unusual Tax Situation

We can see that Seco/Warwick received a tax benefit of zł6.5m. It's always a bit noteworthy when a company is paid by the tax man, rather than paying the tax man. The receipt of a tax benefit is obviously a good thing, on its own. However, our data indicates that tax benefits can temporarily boost statutory profit in the year it is booked, but subsequently profit may fall back. In the likely event the tax benefit is not repeated, we'd expect to see its statutory profit levels drop, at least in the absence of strong growth.

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.

Our Take On Seco/Warwick's Profit Performance

As we have already discussed Seco/Warwick reported that it received a tax benefit, rather than paying tax, in the last year. Given that sort of benefit is not recurring, a focus on the statutory profit might make the company seem better than it really is. Therefore, it seems possible to us that Seco/Warwick's true underlying earnings power is actually less than its statutory profit. 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. So while earnings quality is important, it's equally important to consider the risks facing Seco/Warwick at this point in time. When we did our research, we found 3 warning signs for Seco/Warwick (1 is potentially serious!) that we believe deserve your full attention.

Today we've zoomed in on a single data point to better understand the nature of Seco/Warwick'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. While it might take a little research on your behalf, you may find this free collection of companies boasting high return on equity, or this list of stocks with significant insider holdings to be useful.

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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.