Statistically speaking, it is less risky to invest in profitable companies than in unprofitable ones. That said, the current statutory profit is not always a good guide to a company's underlying profitability. This article will consider whether Avarga's (SGX:U09) statutory profits are a good guide to its underlying earnings.
It's good to see that over the last twelve months Avarga made a profit of S$23.9m on revenue of S$1.44b. In the chart below, you can see that its profit and revenue have both grown over the last three years, although its profit has slipped in the last twelve months.
Not all profits are equal, and we can learn more about the nature of a company's past profitability by diving deeper into the financial statements. This article will focus on the impact unusual items have had on Avarga's statutory earnings. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Avarga.
The Impact Of Unusual Items On Profit
Importantly, our data indicates that Avarga's profit received a boost of S$11m 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. Which is hardly surprising, given the name. If Avarga 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 Avarga's Profit Performance
We'd posit that Avarga's statutory earnings aren't a clean read on ongoing productivity, due to the large unusual item. Because of this, we think that it may be that Avarga's statutory profits are better than its underlying earnings power. Nonetheless, it's still worth noting that its earnings per share have grown at 62% over the last three years. At the end of the day, it's essential to consider more than just the factors above, if you want to understand the company properly. So while earnings quality is important, it's equally important to consider the risks facing Avarga at this point in time. For example - Avarga has 3 warning signs we think you should be aware of.
This note has only looked at a single factor that sheds light on the nature of Avarga's profit. But there is always more to discover if you are capable of focussing your mind on minutiae. 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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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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