We Think Hydrofarm Holdings Group's (NASDAQ:HYFM) Profit Is Only A Baseline For What They Can Achieve

By
Simply Wall St
Published
November 21, 2021
NasdaqGS:HYFM
Source: Shutterstock

Hydrofarm Holdings Group, Inc. (NASDAQ:HYFM) just reported healthy earnings but the stock price didn't move much. Our analysis suggests that investors might be missing some promising details.

Check out our latest analysis for Hydrofarm Holdings Group

earnings-and-revenue-history
NasdaqGS:HYFM Earnings and Revenue History November 22nd 2021

The Impact Of Unusual Items On Profit

To properly understand Hydrofarm Holdings Group's profit results, we need to consider the US$22m 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 that's hardly a surprise given these line items are considered unusual. Hydrofarm Holdings Group took a rather significant hit from unusual items in the year to September 2021. As a result, we can surmise that the unusual items made its statutory profit significantly weaker than it would otherwise be.

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.

An Unusual Tax Situation

Having already discussed the impact of the unusual items, we should also note that Hydrofarm Holdings Group received a tax benefit of US$19m. This is meaningful because companies usually pay tax rather than receive tax benefits. The receipt of a tax benefit is obviously a good thing, on its own. 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, our data indicates that tax benefits can temporarily boost statutory profit in the year it is booked, but subsequently profit may fall back. In the likely event the tax benefit is not repeated, we'd expect to see its statutory profit levels drop, at least in the absence of strong growth. 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 Hydrofarm Holdings Group's Profit Performance

In its last report Hydrofarm Holdings Group received a tax benefit which might make its profit look better than it really is on a underlying level. But on the other hand, it also saw an unusual item depress its profit. Given the contrasting considerations, we don't have a strong view as to whether Hydrofarm Holdings Group's profits are an apt reflection of its underlying potential for profit. If you'd like to know more about Hydrofarm Holdings Group as a business, it's important to be aware of any risks it's facing. For example - Hydrofarm Holdings Group has 3 warning signs we think you should be aware of.

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. Some people consider a high return on equity to be a good sign of a quality business. 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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