Stock Analysis

Does Eastern's (NASDAQ:EML) Statutory Profit Adequately Reflect Its Underlying Profit?

NasdaqGM:EML
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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 Eastern (NASDAQ:EML).

While Eastern was able to generate revenue of US$248.7m in the last twelve months, we think its profit result of US$8.96m was more important. Happily, it has grown both its profit and revenue over the last three years (though we note its profit is down over the last year).

Check out our latest analysis for Eastern

earnings-and-revenue-history
NasdaqGM:EML Earnings and Revenue History January 13th 2021

Importantly, statutory profits are not always the best tool for understanding a company's true earnings power, so it's well worth examining profits in a little more detail. This article will focus on the impact unusual items have had on Eastern's statutory earnings. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Eastern.

The Impact Of Unusual Items On Profit

Importantly, our data indicates that Eastern's profit was reduced by US$3.7m, due to unusual items, over the last year. While deductions due to unusual items are disappointing in the first instance, there is a silver lining. We looked at thousands of listed companies and found that unusual items are very often one-off in nature. And, after all, that's exactly what the accounting terminology implies. Assuming those unusual expenses don't come up again, we'd therefore expect Eastern to produce a higher profit next year, all else being equal.

Our Take On Eastern's Profit Performance

Because unusual items detracted from Eastern'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 Eastern's statutory profit actually understates its earnings potential! And the EPS is up 16% annually, 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. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. At Simply Wall St, we found 3 warning signs for Eastern and we think they deserve your attention.

This note has only looked at a single factor that sheds light on the nature of Eastern'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. 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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