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. In this article, we'll look at how useful this year's statutory profit is, when analysing Chemical Industries (Far East) (SGX:C05).
It's good to see that over the last twelve months Chemical Industries (Far East) made a profit of S$5.27m on revenue of S$61.7m. The chart below shows that both revenue and profit have declined over the last three years.
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 Chemical Industries (Far East)'s most recent profit results. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Chemical Industries (Far East).
The Impact Of Unusual Items On Profit
To properly understand Chemical Industries (Far East)'s profit results, we need to consider the S$1.2m expense attributed to unusual items. While deductions due to unusual items are disappointing in the first instance, there is a silver lining. 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 Chemical Industries (Far East) to produce a higher profit next year, all else being equal.
Our Take On Chemical Industries (Far East)'s Profit Performance
Because unusual items detracted from Chemical Industries (Far East)'s earnings over the last year, you could argue that we can expect an improved result in the current quarter. Based on this observation, we consider it likely that Chemical Industries (Far East)'s statutory profit actually understates its earnings potential! Unfortunately, though, its earnings per share actually fell back over 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. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. Be aware that Chemical Industries (Far East) is showing 3 warning signs in our investment analysis and 1 of those is a bit concerning...
This note has only looked at a single factor that sheds light on the nature of Chemical Industries (Far East)'s profit. But there are plenty of other ways to inform your opinion of a company. Some people consider a high return on equity to be a good sign of a quality business. 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 that insiders are buying to be useful.
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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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