Weak Statutory Earnings May Not Tell The Whole Story For Richardson Electronics (NASDAQ:RELL)

The market rallied behind Richardson Electronics, Ltd.'s (NASDAQ:RELL) stock, leading do a rise in the share price after its recent weak earnings report. Sometimes, shareholders are willing to ignore soft numbers with the hope that they will improve, but our analysis suggests this is unlikely for Richardson Electronics.

Check out our latest analysis for Richardson Electronics

An Unusual Tax Situation

Richardson Electronics reported a tax benefit of US$2.5m, which is well worth noting. It's always a bit noteworthy when a company is paid by the tax man, rather than paying the tax man. 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.

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.

Our Take On Richardson Electronics' Profit Performance

In its most recent report, Richardson Electronics disclosed a tax benefit, as we discussed above. Tax is usually an expense, not a benefit, so we don't think the reported profit number is a particularly good guide to the earning potential of the business. For this reason, we think that Richardson Electronics' statutory profits may be a bad guide to its underlying earnings power, and might give investors an overly positive impression of the company. In further bad news, its earnings per share decreased in the last year. The goal of this article has been to assess how well we can rely on the statutory earnings to reflect the company's potential, but there is plenty more to consider. So if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. For example - Richardson Electronics has 2 warning signs we think you should be aware of.

This note has only looked at a single factor that sheds light on the nature of Richardson Electronics' profit. 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. While it might take a little research on your behalf, you may find this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying to be useful.

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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.