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. This article will consider whether Ark Restaurants‘s (NASDAQ:ARKR) statutory profits are a good guide to its underlying earnings.
It’s good to see that over the last twelve months Ark Restaurants made a profit of US$2.68m on revenue of US$162.4m. The chart below shows how it has grown revenue over the last three years, but that profit has declined.
See our latest analysis for Ark Restaurants
Of course, it is only sensible to look beyond the statutory profits and question how well those numbers represent the sustainable earnings power of the business. As a reuslt, we think it’s important to consider how unusual items and the recent tax benefit have influenced Ark Restaurants’s statutory profit. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Ark Restaurants.
The Impact Of Unusual Items On Profit
For anyone who wants to understand Ark Restaurants’s profit beyond the statutory numbers, it’s important to note that during the last twelve months statutory profit was reduced by US$4.0m due 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. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. And that’s hardly a surprise given these line items are considered unusual. In the twelve months to September 2019, Ark Restaurants had a big unusual items expense. All else being equal, this would likely have the effect of making the statutory profit look worse than its underlying earnings power.
An Unusual Tax Situation
Just as we noted the unusual items, we must inform you that Ark Restaurants received a tax benefit which contributed US$591k 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. However, our data indicates that tax benefits can temporarily boost statutory profit in the year it is booked, but subsequently profit may fall back. Assuming the tax benefit is not repeated every year, we could see its profitability drop noticeably, all else being equal.
Our Take On Ark Restaurants’s Profit Performance
In the last year Ark Restaurants 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. But on the other hand, it also saw an unusual item depress its profit. Based on these factors, we think that Ark Restaurants’s profits are a reasonably conservative guide to its underlying profitability. While it’s very important to consider the profit and loss statement, you can also learn a lot about a company by looking at its balance sheet. If you’re interestedwe have a graphic representation of Ark Restaurants’s balance sheet.
Our examination of Ark Restaurants has focussed on certain factors that can make its earnings look better than they are. But there is always more to discover if you are capable of focussing your mind on minutiae. 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. 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.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.
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December 30, 2019 at 08:38PM
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Does Ark Restaurants’s (NASDAQ:ARKR) Statutory Profit Adequately Reflect Its Underlying Profit? - Simply Wall St
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