Chemical Industries (Far East) Limited (SGX:C05) announced a healthy earnings result recently, and the market rewarded it with a strong stock price reaction. This reaction by the market reaction is understandable when looking at headline profits and we have found some further encouraging factors.

View our latest analysis for Chemical Industries (Far East)

How Do Unusual Items Influence Profit?

For anyone who wants to understand Chemical Industries (Far East)'s profit beyond the statutory numbers, it's important to note that during the last twelve months statutory profit was reduced by S$3.9m due to unusual items. While deductions due to unusual items are disappointing in the first instance, there is a silver lining. We looked at thousands of listed companies and found that unusual items are very often one-off in nature. And, after all, that's exactly what the accounting terminology implies. In the twelve months to March 2022, Chemical Industries (Far East) 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.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Chemical Industries (Far East).

An Unusual Tax Situation

Having already discussed the impact of the unusual items, we should also note that Chemical Industries (Far East) received a tax benefit of S$989k. 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. While we think it's good that the company has booked a tax benefit, it does mean that there's every chance the statutory profit will come in a lot higher than it would be if the income was adjusted for one-off factors.

Our Take On Chemical Industries (Far East)'s Profit Performance

In its last report Chemical Industries (Far East) 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. Based on these factors, we think that Chemical Industries (Far East)'s profits are a reasonably conservative guide to its underlying profitability. If you'd like to know more about Chemical Industries (Far East) as a business, it's important to be aware of any risks it's facing. To that end, you should learn about the 3 warning signs we've spotted with Chemical Industries (Far East) (including 1 which shouldn't be ignored).

Our examination of Chemical Industries (Far East) 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. 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.

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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.