Stock Analysis

Are Amneal Pharmaceuticals's (NYSE:AMRX) Statutory Earnings A Good Reflection Of Its Earnings Potential?

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NYSE:AMRX
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As a general rule, we think profitable companies are less risky than companies that lose money. That said, the current statutory profit is not always a good guide to a company's underlying profitability. In this article, we'll look at how useful this year's statutory profit is, when analysing Amneal Pharmaceuticals (NYSE:AMRX).

It's good to see that over the last twelve months Amneal Pharmaceuticals made a profit of US$62.0m on revenue of US$1.88b.

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earnings-and-revenue-history
NYSE:AMRX Earnings and Revenue History December 6th 2020

Not all profits are equal, and we can learn more about the nature of a company's past profitability by diving deeper into the financial statements. As a reuslt, we think it's important to consider how unusual items and the recent tax benefit have influenced Amneal Pharmaceuticals' statutory profit. 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.

The Impact Of Unusual Items On Profit

For anyone who wants to understand Amneal Pharmaceuticals' profit beyond the statutory numbers, it's important to note that during the last twelve months statutory profit was reduced by US$294m due to unusual items. 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 that's hardly a surprise given these line items are considered unusual. Amneal Pharmaceuticals took a rather significant hit from unusual items in the year to September 2020. As a result, we can surmise that the unusual items made its statutory profit significantly weaker than it would otherwise be.

An Unusual Tax Situation

Just as we noted the unusual items, we must inform you that Amneal Pharmaceuticals received a tax benefit which contributed US$98m to the bottom line. This is meaningful because companies usually pay tax rather than receive tax benefits. Of course, prima facie it's great to receive a tax benefit. And since it previously lost money, it may well simply indicate the realisation of past tax losses. 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. 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 Amneal Pharmaceuticals' Profit Performance

In the last year Amneal Pharmaceuticals received a tax benefit, which boosted its profit in a way that might not be much more sustainable than turning prime farmland into gas fields. Having said that, it also had a unusual item reducing its profit. Considering the aforementioned, we think that Amneal Pharmaceuticals' profits are probably a reasonable reflection of its underlying profitability; although we'd be confident in that conclusion if we saw a cleaner set of results. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. To help with this, we've discovered 3 warning signs (1 doesn't sit too well with us!) that you ought to be aware of before buying any shares in Amneal Pharmaceuticals.

In this article we've looked at a number of factors that can impair the utility of profit numbers, as a guide to a business. But there are plenty of other ways to inform your opinion of a company. 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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What are the risks and opportunities for Amneal Pharmaceuticals?

Amneal Pharmaceuticals, Inc., together with its subsidiaries, develops, licenses, manufactures, markets, and distributes generic and specialty pharmaceutical products for various dosage forms and therapeutic areas.

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Rewards

  • Trading at 82.9% below our estimate of its fair value

Risks

  • Earnings have declined by 26.7% per year over past 5 years

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