Should You Use Parker-Hannifin’s (NYSE:PH) Statutory Earnings To Analyse It?

Statistically speaking, it is less risky to invest in profitable companies than in unprofitable ones. That said, the current statutory profit is not always a good guide to a company’s underlying profitability. Today we’ll focus on whether this year’s statutory profits are a good guide to understanding Parker-Hannifin (NYSE:PH).

It’s good to see that over the last twelve months Parker-Hannifin made a profit of US$1.37b on revenue of US$14.2b. In the chart below, you can see that its profit and revenue have both grown over the last three years, albeit not in the last year.

Check out our latest analysis for Parker-Hannifin

NYSE:PH Income Statement April 8th 2020
NYSE:PH Income Statement April 8th 2020

Of course, when it comes to statutory profit, the devil is often in the detail, and we can get a better sense for a company by diving deeper into the financial statements. This article will discuss how unusual items have impacted Parker-Hannifin’s most recent profit results. 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 Parker-Hannifin’s profit results, we need to consider the US$222m expense attributed to unusual items. 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 that’s hardly a surprise given these line items are considered unusual. If Parker-Hannifin doesn’t see those unusual expenses repeat, then all else being equal we’d expect its profit to increase over the coming year.

Our Take On Parker-Hannifin’s Profit Performance

Unusual items (expenses) detracted from Parker-Hannifin’s earnings over the last year, but we might see an improvement next year. Because of this, we think Parker-Hannifin’s earnings potential is at least as good as it seems, and maybe even better! And the EPS is up 62% annually, over the last three years. Of course, we’ve only just scratched the surface when it comes to analysing its earnings; one could also consider margins, forecast growth, and return on investment, among other factors. So while earnings quality is important, it’s equally important to consider the risks facing Parker-Hannifin at this point in time. Every company has risks, and we’ve spotted 2 warning signs for Parker-Hannifin you should know about.

Today we’ve zoomed in on a single data point to better understand the nature of Parker-Hannifin’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.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned.

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