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Should You Use Newmark Security’s (LON:NWT) Statutory Earnings To Analyse It? – Simply Wall St


Statistically speaking, it is less risky to invest in profitable companies than in unprofitable ones. However, sometimes companies receive a one-off boost (or reduction) to their profit, and it’s not always clear whether statutory profits are a good guide, going forward. Today we’ll focus on whether this year’s statutory profits are a good guide to understanding Newmark Security (LON:NWT).

We like the fact that Newmark Security made a profit of UK£845.0k on its revenue of UK£19.9m, in the last year.

View our latest analysis for Newmark Security

AIM:NWT Income Statement, February 10th 2020
AIM:NWT Income Statement, February 10th 2020

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 Newmark Security’s statutory profit. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Newmark Security.

The Impact Of Unusual Items On Profit

To properly understand Newmark Security’s profit results, we need to consider the UK£352k expense attributed to unusual items. While deductions due to unusual items are disappointing in the first instance, there is a silver lining. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. And, after all, that’s exactly what the accounting terminology implies. In the twelve months to October 2019, Newmark Security 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 Newmark Security received a tax benefit which contributed UK£438k to the bottom line. It’s always a bit noteworthy when a company is paid by the tax man, rather than paying the tax man. The receipt of a tax benefit is obviously a good thing, on its own. And since it previously lost money, it may well simply indicate the realisation of past tax losses. 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.

Our Take On Newmark Security’s Profit Performance

In the last year Newmark Security 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, it’s hard to tell if Newmark Security’s profits are a reasonable reflection of its underlying profitability. While earnings are important, another area to consider is the balance sheet. If you’re interestedwe have a graphic representation of Newmark Security’s balance sheet.

In this article we’ve looked at a number of factors that can impair the utility of profit numbers, as a guide to a business. 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. 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.

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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