Stock Analysis

Does L.B. Foster's (NASDAQ:FSTR) Statutory Profit Adequately Reflect Its Underlying Profit?

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Statistically speaking, it is less risky to invest in profitable companies than in unprofitable ones. 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. This article will consider whether L.B. Foster's (NASDAQ:FSTR) statutory profits are a good guide to its underlying earnings.

We like the fact that L.B. Foster made a profit of US$48.3m on its revenue of US$561.8m, in the last year. The chart below shows that revenue has improved over the last three years, and, even better, the company has moved from unprofitable to profitable.

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NasdaqGS:FSTR Earnings and Revenue History November 26th 2020

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. As a reuslt, we think it's important to consider how unusual items and the recent tax benefit have influenced L.B. Foster's statutory profit. 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.

The Impact Of Unusual Items On Profit

To properly understand L.B. Foster's profit results, we need to consider the US$1.6m 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, after all, that's exactly what the accounting terminology implies. Assuming those unusual expenses don't come up again, we'd therefore expect L.B. Foster to produce a higher profit next year, all else being equal.

An Unusual Tax Situation

Just as we noted the unusual items, we must inform you that L.B. Foster received a tax benefit which contributed US$41m to the bottom line. This is of course a bit out of the ordinary, given it is more common for companies to be paying tax than receiving tax benefits! We're sure the company was pleased with its tax benefit. And given that it lost money last year, it seems possible that the benefit is evidence that it now expects to find value in its past tax losses. However, the devil in the detail is that these kind of benefits only impact in the year they are booked, and are often one-off in nature. Assuming the tax benefit is not repeated every year, we could see its profitability drop noticeably, all else being equal. While we think it's good that the company has booked a tax benefit, it does mean that there's every chance the statutory profit will come in a lot higher than it would be if the income was adjusted for one-off factors.

Our Take On L.B. Foster's Profit Performance

In the last year L.B. Foster received a tax benefit, which boosted its profit in a way that might not be much more sustainable than turning prime farmland into gas fields. Having said that, it also had a unusual item reducing its profit. Based on these factors, we think it's very unlikely that L.B. Foster's statutory profits make it seem much weaker than it is. So while earnings quality is important, it's equally important to consider the risks facing L.B. Foster at this point in time. You'd be interested to know, that we found 1 warning sign for L.B. Foster and you'll want to know about it.

In this article we've looked at a number of factors that can impair the utility of profit numbers, as a guide to a business. But there are plenty of other ways to inform your opinion of a company. 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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What are the risks and opportunities for L.B. Foster?

L.B. Foster Company provides engineered and manufactured products and services for the building and infrastructure projects worldwide.

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  • Earnings are forecast to grow 209.35% per year


No risks detected for FSTR from our risks checks.

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