Brookfield Business' (NYSE:BBUC) Profits Appear To Have Quality Issues

The stock price didn't jump after Brookfield Business Corporation (NYSE:BBUC) posted decent earnings last week. We think that investors might be worried about some concerning underlying factors.

Check out our latest analysis for Brookfield Business

The Impact Of Unusual Items On Profit

For anyone who wants to understand Brookfield Business' profit beyond the statutory numbers, it's important to note that during the last twelve months statutory profit was reduced by US$65m due 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. We looked at thousands of listed companies and found that unusual items are very often one-off in nature. And that's hardly a surprise given these line items are considered unusual. Assuming those unusual expenses don't come up again, we'd therefore expect Brookfield Business to produce a higher profit next year, all else being equal.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Brookfield Business.

An Unusual Tax Situation

Having already discussed the impact of the unusual items, we should also note that Brookfield Business received a tax benefit of US$398m. This is meaningful because companies usually pay tax rather than receive tax benefits. We're sure the company was pleased with its tax benefit. And since it previously lost money, it may well simply indicate the realisation of 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. 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 Brookfield Business' Profit Performance

In the last year Brookfield Business 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. But on the other hand, it also saw an unusual item depress its profit. Based on these factors, we think it's very unlikely that Brookfield Business' 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 Brookfield Business at this point in time. At Simply Wall St, we found 1 warning sign for Brookfield Business and we think they deserve your attention.

Our examination of Brookfield Business has focussed on certain factors that can make its earnings look better than they are. 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. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.