Senior’s (LON:SNR) promising earnings may rest on weak fundamentals

Despite publishing some solid financial results, the market Older joint stock companies (LON:SNR) shares were little changed. Our analysis suggests this may be because shareholders have noticed some worrying underlying factors.

See our latest analysis for Seniors

An unusual tax situation

Senior reported a tax benefit of £7.9m, which is worth noting. It’s always a bit of a surprise when a company is paid by the Inland Revenue rather than the taxman. We’re sure the company was happy with its tax benefit. However, our data suggests that tax benefits can temporarily boost statutory profits in the year they’re booked, but profits can fall thereafter. Assuming the tax benefit doesn’t recur every year, we could see a significant drop in profitability, all else being equal. So, while we think it’s great to receive a tax benefit, it does tend to imply an increased risk that statutory profits overstate the sustainable earning power of the company.

This may leave you wondering what the analysts are predicting in terms of future profitability. Fortunately, you can click here to see an interactive chart showing future profitability, based on their estimates.

Our Opinion on Seniors’ Financial Results

As we’ve already discussed, Senior reported that it received a tax break last year instead of paying tax. Given that this type of benefit is not repeatable, focusing on the statutory profit can make the company seem better than it actually is. For this reason, we believe that Senior’s statutory profits may be better than its underlying earnings power. The good news is that its earnings per share grew by 40% last year. At the end of the day, if you want to properly understand a company, it’s important to consider more than just the above factors. While it’s really important to consider how well a company’s statutory profits reflect its underlying earnings power, it’s also worth looking at what analysts are forecasting for the future. Luckily, you can check out the analyst forecasts by clicking here.

Today we’ve focused on one data point to better understand the nature of Senior’s profit. But there are many other ways to form an opinion about a company. Some people believe that a high return on equity is a good sign of a good company. While it may take a little research on your part, you can determine that free a list of companies with high return on equity or a list of stocks in which insiders own shares may be useful.

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This Simply Wall St article is for general information purposes only. Our commentary is based solely on historical data and analyst forecasts, and is based on an objective methodology. Our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or your financial situation. Our goal is to provide you with long-term, focused analysis based on fundamental data. Please note that our analysis may not reflect the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.