Are Element Solutions's (NYSE:ESI) Statutory Earnings A Good Guide To Its Underlying Profitability?

By
Simply Wall St
Published
November 05, 2020
NYSE:ESI

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. This article will consider whether Element Solutions' (NYSE:ESI) statutory profits are a good guide to its underlying earnings.

It's good to see that over the last twelve months Element Solutions made a profit of US$121.2m on revenue of US$1.77b. Even though revenue is down over the last three years, you can see in the chart below that the company has moved from loss-making to profitable.

View our latest analysis for Element Solutions

earnings-and-revenue-history
NYSE:ESI Earnings and Revenue History November 5th 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 focus on the impact unusual items have had on Element Solutions' 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?

Importantly, our data indicates that Element Solutions' profit was reduced by US$42m, due to unusual items, over the last year. 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, after all, that's exactly what the accounting terminology implies. If Element Solutions 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 Element Solutions' Profit Performance

Because unusual items detracted from Element Solutions' 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 Element Solutions' statutory profit actually understates its earnings potential! And it's also positive that the company showed enough improvement to book a profit this year, after losing money last year. At the end of the day, it's essential to consider more than just the factors above, if you want to understand the company properly. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. When we did our research, we found 2 warning signs for Element Solutions (1 is significant!) that we believe deserve your full attention.

This note has only looked at a single factor that sheds light on the nature of Element Solutions' 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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