Stock Analysis

Does Cognex's (NASDAQ:CGNX) Statutory Profit Adequately Reflect Its Underlying Profit?

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NasdaqGS:CGNX
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Broadly speaking, profitable businesses are less risky than unprofitable ones. Having said that, sometimes statutory profit levels are not a good guide to ongoing profitability, because some short term one-off factor has impacted profit levels. Today we'll focus on whether this year's statutory profits are a good guide to understanding Cognex (NASDAQ:CGNX).

It's good to see that over the last twelve months Cognex made a profit of US$187.2m on revenue of US$757.2m. As you can see in the chart below, its profit has declined over the last three years, even though its revenue has increased.

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earnings-and-revenue-history
NasdaqGS:CGNX Earnings and Revenue History January 12th 2021

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 discuss how unusual items and a tax benefit have impacted Cognex's most recent bottom line results. 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

To properly understand Cognex's profit results, we need to consider the US$35m expense attributed 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. 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. If Cognex doesn't see those unusual expenses repeat, then all else being equal we'd expect its profit to increase over the coming year.

An Unusual Tax Situation

Having already discussed the impact of the unusual items, we should also note that Cognex received a tax benefit of US$42m. 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! Of course, prima facie it's great to receive a tax benefit. 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.

Our Take On Cognex's Profit Performance

In its last report Cognex received a tax benefit which might make its profit look better than it really is on a underlying level. Having said that, it also had a unusual item reducing its profit. Based on these factors, it's hard to tell if Cognex's profits are a reasonable reflection of its underlying profitability. So if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. In terms of investment risks, we've identified 2 warning signs with Cognex, and understanding them should be part of your investment process.

Our examination of Cognex has focussed on certain factors that can make its earnings look better than they are. 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 Cognex?

Cognex Corporation provides machine vision products that capture and analyze visual information in order to automate manufacturing and distribution tasks worldwide.

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Rewards

  • Earnings are forecast to grow 13.85% per year

Risks

No risks detected for CGNX from our risks checks.

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