Aptiv PLC (NYSE:APTV) announced strong profits, but the stock was stagnant. We did some digging, and we found some concerning factors in the details.
Check out our latest analysis for Aptiv
How Do Unusual Items Influence Profit?
For anyone who wants to understand Aptiv’s profit beyond the statutory numbers, it’s important to note that during the last twelve months statutory profit was reduced by US$401m due 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 that’s hardly a surprise given these line items are considered unusual. If Aptiv doesn’t see those unusual expenses repeat, then all else being equal we’d expect its profit to increase over the coming year.
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.
An Unusual Tax Situation
Having already discussed the impact of the unusual items, we should also note that Aptiv received a tax benefit of US$1.9b. This is of course a bit out of the ordinary, given it is more common for companies to be paying tax than receiving tax benefits! We’re sure the company was pleased with its 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 Aptiv’s Profit Performance
In its last report Aptiv received a tax benefit which might make its profit look better than it really is on a underlying level. But on the other hand, it also saw an unusual item depress its profit. Having considered these factors, we don’t think Aptiv’s statutory profits give an overly harsh view of the business. So while earnings quality is important, it’s equally important to consider the risks facing Aptiv at this point in time. Every company has risks, and we’ve spotted 2 warning signs for Aptiv (of which 1 is concerning!) you should know about.
Our examination of Aptiv has focussed on certain factors that can make its earnings look better than they are. But there are plenty of other ways to inform your opinion of a company. 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 with significant insider holdings to be useful.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.