Investors Can Find Comfort In Saudi Basic Industries' (TADAWUL:2010) Earnings Quality

Soft earnings didn't appear to concern Saudi Basic Industries Corporation's (TADAWUL:2010) shareholders over the last week. We did some digging, and we believe the earnings are stronger than they seem.

See our latest analysis for Saudi Basic Industries

The Impact Of Unusual Items On Profit

For anyone who wants to understand Saudi Basic Industries' profit beyond the statutory numbers, it's important to note that during the last twelve months statutory profit was reduced by ر.س1.9b due to unusual items. It's never great to see unusual items costing the company profits, but on the upside, things might improve sooner rather than later. 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 Saudi Basic Industries to produce a higher profit next year, all else being equal.

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.

An Unusual Tax Situation

Having already discussed the impact of the unusual items, we should also note that Saudi Basic Industries received a tax benefit of ر.س468m. This is meaningful because companies usually pay tax rather than receive tax benefits. Of course, prima facie it's great to receive a tax benefit. 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.

Our Take On Saudi Basic Industries' Profit Performance

In its last report Saudi Basic Industries received a tax benefit which might make its profit look better than it really is on a underlying level. But on the other hand, it also saw an unusual item depress its profit. Based on these factors, we think that Saudi Basic Industries' profits are a reasonably conservative guide to its underlying profitability. If you want to do dive deeper into Saudi Basic Industries, you'd also look into what risks it is currently facing. To that end, you should learn about the 2 warning signs we've spotted with Saudi Basic Industries (including 1 which is a bit unpleasant).

Our examination of Saudi Basic Industries has focussed on certain factors that can make its earnings look better than they are. 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 with high insider ownership.

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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.