There May Be Underlying Issues With The Quality Of Valhi's (NYSE:VHI) Earnings

Despite announcing strong earnings, Valhi, Inc.'s (NYSE:VHI) stock was sluggish. We think that the market might be paying attention to some underlying factors that they find to be concerning.

Check out our latest analysis for Valhi

How Do Unusual Items Influence Profit?

Importantly, our data indicates that Valhi's profit received a boost of US$65m in unusual items, over the last year. We can't deny that higher profits generally leave us optimistic, but we'd prefer it if the profit were to be sustainable. When we crunched the numbers on thousands of publicly listed companies, we found that a boost from unusual items in a given year is often not repeated the next year. And that's as you'd expect, given these boosts are described as 'unusual'. We can see that Valhi's positive unusual items were quite significant relative to its profit in the year to September 2024. As a result, we can surmise that the unusual items are making its statutory profit significantly stronger than it would otherwise be.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Valhi.

Our Take On Valhi's Profit Performance

As we discussed above, we think the significant positive unusual item makes Valhi's earnings a poor guide to its underlying profitability. For this reason, we think that Valhi's statutory profits may be a bad guide to its underlying earnings power, and might give investors an overly positive impression of the company. On the bright side, 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. Case in point: We've spotted 3 warning signs for Valhi you should be mindful of and 1 of these doesn't sit too well with us.

This note has only looked at a single factor that sheds light on the nature of Valhi'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 with high insider ownership.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.