Here’s Why We Don’t Think Emkay Taps and Cutting Tools’s (NSE:EMKAYTOOLS) Statutory Earnings Reflect Its Underlying Earnings Potential

Statistically speaking, it is less risky to invest in profitable companies than in 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 Emkay Taps and Cutting Tools’ (NSE:EMKAYTOOLS) statutory profits are a good guide to its underlying earnings.

It’s good to see that over the last twelve months Emkay Taps and Cutting Tools made a profit of ₹119.2m on revenue of ₹465.4m. The chart below shows that both revenue and profit have declined over the last three years.

Check out our latest analysis for Emkay Taps and Cutting Tools


NSEI:EMKAYTOOLS Earnings and Revenue History December 15th 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. Today, we’ll look at how the recent spike in non-operating revenue has impacted Emkay Taps and Cutting Tools’ most recent results. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Emkay Taps and Cutting Tools.

Operating Revenue Or Not?

Companies will classify their revenue streams as either operating revenue or other revenue. Where possible, we prefer rely on operating revenue to get a better understanding of how the business is functioning. Importantly, the non-operating revenue often comes without associated ongoing costs, so it can boost profit by letting it fall straight to the bottom line, making the operating business seem better than it really is. Notably, Emkay Taps and Cutting Tools had a significant increase in non-operating revenue over the last year. Indeed, its non-operating revenue spiked from ₹428.4m last year to ₹465.4m this year. The high levels of non-operating are problematic because if (and when) they do not repeat, then overall revenue (and profitability) of the firm will fall. In order to better understand a company’s profit result, it can sometimes help to consider whether the result would be very different without a sudden increase in non-operating revenue.

Our Take On Emkay Taps and Cutting Tools’ Profit Performance

Since Emkay Taps and Cutting Tools saw a big increase in its non-operating revenue over the last twelve months, we’d be very cautious about relying too heavily on the statutory profit number, which would have benefitted from this potentially unsustainable change. For this reason, we think that Emkay Taps and Cutting Tools’ statutory profits may be a bad guide to its underlying earnings power, and might give investors an overly positive impression of the company. The silver lining is that its EPS growth over the last year has been really wonderful, even if it’s not a perfect measure. 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. If you’d like to know more about Emkay Taps and Cutting Tools as a business, it’s important to be aware of any risks it’s facing. To help with this, we’ve discovered 3 warning signs (2 are significant!) that you ought to be aware of before buying any shares in Emkay Taps and Cutting Tools.

This note has only looked at a single factor that sheds light on the nature of Emkay Taps and Cutting Tools’ profit. But there are plenty of other ways to inform your opinion of a company. 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. 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. 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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