Should You Rely On FutureFuel's (NYSE:FF) Earnings Growth?

By
Simply Wall St
Published
November 10, 2020
NYSE:FF

Broadly speaking, profitable businesses are less risky than unprofitable ones. That said, the current statutory profit is not always a good guide to a company's underlying profitability. This article will consider whether FutureFuel's (NYSE:FF) statutory profits are a good guide to its underlying earnings.

We like the fact that FutureFuel made a profit of US$113.2m on its revenue of US$186.4m, in the last year. As depicted below, while its revenue may have fallen over the last few years, its profit actually improved.

Check out our latest analysis for FutureFuel

earnings-and-revenue-history
NYSE:FF Earnings and Revenue History November 10th 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 FutureFuel'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 FutureFuel.

An Unusual Tax Situation

We can see that FutureFuel received a tax benefit of US$28m. This is of course a bit out of the ordinary, given it is more common for companies to be paying tax than receiving tax benefits! We're sure the company was pleased with its tax benefit. However, our data indicates that tax benefits can temporarily boost statutory profit in the year it is booked, but subsequently profit may fall back. 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. So while we think it's great to receive a tax benefit, it does tend to imply an increased risk that the statutory profit overstates the sustainable earnings power of the business.

Our Take On FutureFuel's Profit Performance

As we have already discussed FutureFuel reported that it received a tax benefit, rather than paying tax, in the last year. Given that sort of benefit is not recurring, a focus on the statutory profit might make the company seem better than it really is. Because of this, we think that it may be that FutureFuel's statutory profits are better than its underlying earnings power. But the good news is that its EPS growth over the last three years has been very impressive. 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 FutureFuel at this point in time. At Simply Wall St, we found 1 warning sign for FutureFuel and we think they deserve your attention.

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