Are Eastman Chemical's (NYSE:EMN) Statutory Earnings A Good Reflection Of Its Earnings Potential?

As a general rule, we think profitable companies are less risky than companies that lose money. 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. Today we'll focus on whether this year's statutory profits are a good guide to understanding Eastman Chemical (NYSE:EMN).

It's good to see that over the last twelve months Eastman Chemical made a profit of US$472.0m on revenue of US$8.49b. In the last few years both its revenue and its profit have fallen, as you can see in the chart below.

View our latest analysis for Eastman Chemical

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 Eastman Chemical'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.

How Do Unusual Items Influence Profit?

For anyone who wants to understand Eastman Chemical's profit beyond the statutory numbers, it's important to note that during the last twelve months statutory profit was reduced by US$297m 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. 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. Assuming those unusual expenses don't come up again, we'd therefore expect Eastman Chemical to produce a higher profit next year, all else being equal.

Our Take On Eastman Chemical's Profit Performance

Because unusual items detracted from Eastman Chemical's 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 Eastman Chemical's statutory profit actually understates its earnings potential! Unfortunately, though, its earnings per share actually fell back over the last year. The goal of this article has been to assess how well we can rely on the statutory earnings to reflect the company's potential, but there is plenty more to consider. So while earnings quality is important, it's equally important to consider the risks facing Eastman Chemical at this point in time. Case in point: We've spotted 4 warning signs for Eastman Chemical you should be aware of.

Today we've zoomed in on a single data point to better understand the nature of Eastman Chemical's profit. But there is always more to discover if you are capable of focussing your mind on minutiae. 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. 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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