Are Innovative Solutions and Support's (NASDAQ:ISSC) Statutory Earnings A Good Reflection Of Its Earnings Potential?

Many investors consider it preferable to invest in profitable companies over unprofitable ones, because profitability suggests a business is sustainable. However, sometimes companies receive a one-off boost (or reduction) to their profit, and it's not always clear whether statutory profits are a good guide, going forward. In this article, we'll look at how useful this year's statutory profit is, when analysing Innovative Solutions and Support (NASDAQ:ISSC).

While Innovative Solutions and Support was able to generate revenue of US$22.0m in the last twelve months, we think its profit result of US$3.18m was more important.

See our latest analysis for Innovative Solutions and Support

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 discuss how a tax benefit impacted Innovative Solutions and Support's most recent profit results. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Innovative Solutions and Support.

An Unusual Tax Situation

We can see that Innovative Solutions and Support received a tax benefit of US$299k. 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. However, our data indicates that tax benefits can temporarily boost statutory profit in the year it is booked, but subsequently profit may fall back. Assuming the tax benefit is not repeated every year, we could see its profitability drop noticeably, all else being equal.

Our Take On Innovative Solutions and Support's Profit Performance

As we have already discussed Innovative Solutions and Support reported that it received a tax benefit, rather than paying tax, in the last year. Given that sort of benefit is not recurring, a focus on the statutory profit might make the company seem better than it really is. Because of this, we think that it may be that Innovative Solutions and Support's statutory profits are better than its underlying earnings power. The good news is that, its earnings per share increased by 55% in the last year. 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 Innovative Solutions and Support at this point in time. Case in point: We've spotted 2 warning signs for Innovative Solutions and Support you should be aware of.

Today we've zoomed in on a single data point to better understand the nature of Innovative Solutions and Support's profit. 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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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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