Are ZK International Group's (NASDAQ:ZKIN) Statutory Earnings A Good Reflection Of Its Earnings Potential?

By
Simply Wall St
Published
September 30, 2020

Statistically speaking, it is less risky to invest in profitable companies than in unprofitable ones. 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 ZK International Group (NASDAQ:ZKIN).

While ZK International Group was able to generate revenue of US$72.5m in the last twelve months, we think its profit result of US$4.36m was more important. While it managed to grow its revenue over the last three years, its profit has moved in the other direction, as you can see in the chart below.

View our latest analysis for ZK International Group

NasdaqCM:ZKIN Earnings and Revenue History September 30th 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. Therefore, we think it makes sense to note and understand the impact that a tax benefit has had on ZK International Group's statutory profit in the last twelve months. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of ZK International Group.

An Unusual Tax Situation

We can see that ZK International Group received a tax benefit of US$405k. This is meaningful because companies usually pay tax rather than receive tax benefits. We're sure the company was pleased with its tax benefit. However, the devil in the detail is that these kind of benefits only impact in the year they are booked, and are often one-off in nature. In the likely event the tax benefit is not repeated, we'd expect to see its statutory profit levels drop, at least in the absence of strong growth.

Our Take On ZK International Group's Profit Performance

ZK International Group reported that it received a tax benefit, rather than paid tax, in its last report. As a result we don't think its profit result, which includes that tax-boost, is a good guide to its sustainable profit levels. Because of this, we think that it may be that ZK International Group's statutory profits are better than its underlying earnings power. Sadly, its EPS was down over the last twelve months. 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. If you'd like to know more about ZK International Group as a business, it's important to be aware of any risks it's facing. In terms of investment risks, we've identified 2 warning signs with ZK International Group, 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 ZK International Group'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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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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