Here's Why We Think Formosa Petrochemical's (TPE:6505) Statutory Earnings Might Be Conservative

As a general rule, we think profitable companies are less risky than companies that lose money. Having said that, sometimes statutory profit levels are not a good guide to ongoing profitability, because some short term one-off factor has impacted profit levels. Today we'll focus on whether this year's statutory profits are a good guide to understanding Formosa Petrochemical (TPE:6505).

It's good to see that over the last twelve months Formosa Petrochemical made a profit of NT$4.30b on revenue of NT$462.2b. Below, you can see that both its revenue and its profit have fallen over the last three years.

Check out our latest analysis for Formosa Petrochemical

Of course, when it comes to statutory profit, the devil is often in the detail, and we can get a better sense for a company by diving deeper into the financial statements. This article will discuss how unusual items have impacted Formosa Petrochemical'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 Formosa Petrochemical's profit results, we need to consider the NT$147m expense attributed 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, after all, that's exactly what the accounting terminology implies. In the twelve months to September 2020, Formosa Petrochemical had a big unusual items expense. All else being equal, this would likely have the effect of making the statutory profit look worse than its underlying earnings power.

Our Take On Formosa Petrochemical's Profit Performance

As we mentioned previously, the Formosa Petrochemical's profit was hampered by unusual items in the last year. Based on this observation, we consider it possible that Formosa Petrochemical's statutory profit actually understates its earnings potential! On the other hand, its EPS actually shrunk in the last twelve months. 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 Formosa Petrochemical at this point in time. You'd be interested to know, that we found 2 warning signs for Formosa Petrochemical and you'll want to know about them.

Today we've zoomed in on a single data point to better understand the nature of Formosa Petrochemical'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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