Stock Analysis

Does Baxter International's (NYSE:BAX) Statutory Profit Adequately Reflect Its Underlying Profit?

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NYSE:BAX
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Many investors consider it preferable to invest in profitable companies over unprofitable ones, because profitability suggests a business is sustainable. 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 Baxter International (NYSE:BAX).

We like the fact that Baxter International made a profit of US$911.0m on its revenue of US$11.5b, in the last year. As you can see in the chart below, its profit has declined over the last three years, even though its revenue has increased.

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NYSE:BAX Earnings and Revenue History January 24th 2021

Importantly, statutory profits are not always the best tool for understanding a company's true earnings power, so it's well worth examining profits in a little more detail. This article will focus on the impact unusual items have had on Baxter International's statutory earnings. 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 Baxter International's profit results, we need to consider the US$930m expense attributed 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. Baxter International took a rather significant hit from unusual items in the year to September 2020. As a result, we can surmise that the unusual items made its statutory profit significantly weaker than it would otherwise be.

Our Take On Baxter International's Profit Performance

As we mentioned previously, the Baxter International's profit was hampered by unusual items in the last year. Because of this, we think Baxter International's underlying earnings potential is as good as, or possibly even better, than the statutory profit makes it seem! Unfortunately, though, its earnings per share actually fell back over the last year. 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. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. Every company has risks, and we've spotted 3 warning signs for Baxter International you should know about.

This note has only looked at a single factor that sheds light on the nature of Baxter International's 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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What are the risks and opportunities for Baxter International?

Baxter International Inc., through its subsidiaries, develops and provides a portfolio of healthcare products worldwide.

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Rewards

  • Trading at 39.8% below our estimate of its fair value

  • Earnings are forecast to grow 64.32% per year

Risks

  • Debt is not well covered by operating cash flow

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