Soft earnings didn't appear to concern Crown Crafts, Inc.'s (NASDAQ:CRWS) shareholders over the last week. We think that the softer headline numbers might be getting counterbalanced by some positive underlying factors.
The Impact Of Unusual Items On Profit
For anyone who wants to understand Crown Crafts' profit beyond the statutory numbers, it's important to note that during the last twelve months statutory profit was reduced by US$2.2m due 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. If Crown Crafts doesn't see those unusual expenses repeat, then all else being equal we'd expect its profit to increase over the coming year.
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.
Our Take On Crown Crafts' Profit Performance
Because unusual items detracted from Crown Crafts' earnings over the last year, you could argue that we can expect an improved result in the current quarter. Based on this observation, we consider it likely that Crown Crafts' statutory profit actually understates its earnings potential! Better yet, its EPS are growing strongly, which is nice to see. 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 Crown Crafts at this point in time. In terms of investment risks, we've identified 3 warning signs with Crown Crafts, and understanding these should be part of your investment process.
This note has only looked at a single factor that sheds light on the nature of Crown Crafts' profit. But there is always more to discover if you are capable of focussing your mind on minutiae. 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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