Many investors consider it preferable to invest in profitable companies over unprofitable ones, because profitability suggests a business is sustainable. That said, the current statutory profit is not always a good guide to a company’s underlying profitability. This article will consider whether Kelly Services‘s (NASDAQ:KELY.A) statutory profits are a good guide to its underlying earnings.
We like the fact that Kelly Services made a profit of US$70.8m on its revenue of US$5.43b, in the last year. The chart below shows that revenue has been flat over the last three years, while profit has actually declined.
Check out our latest analysis for Kelly Services
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 Kelly Services’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
Importantly, our data indicates that Kelly Services’s profit was reduced by US$42m, due to unusual items, over the last year. 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. Kelly Services took a rather significant hit from unusual items in the year to September 2019. 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
Having already discussed the impact of the unusual items, we should also note that Kelly Services received a tax benefit of US$17m. This is meaningful because companies usually pay tax rather than receive tax benefits. The receipt of a tax benefit is obviously a good thing, on its own. 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. 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 Kelly Services’s Profit Performance
In the last year Kelly Services 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 all the aforementioned, we’d venture that Kelly Services’s profit result is a pretty good guide to its true profitability, albeit a bit on the conservative side. Ultimately, this article has formed an opinion based on historical data. However, it can also be great to think about what analysts are forecasting for the future. Luckily, you can check out what analysts are forecsting by clicking here.
Our examination of Kelly Services 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. 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.
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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January 02, 2020 at 09:21PM
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Does Kelly Services’s (NASDAQ:KELY.A) Statutory Profit Adequately Reflect Its Underlying Profit? - Simply Wall St
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