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Eagle Eye Solutions Group plc's (LON:EYE) stock rose after it released a robust earnings report. Despite the strong profit numbers, we believe that there are some deeper issues which investors should look into.
How Do Unusual Items Influence Profit?
For anyone who wants to understand Eagle Eye Solutions Group's profit beyond the statutory numbers, it's important to note that during the last twelve months statutory profit gained from UK£1.3m worth of unusual items. While it's always nice to have higher profit, a large contribution from unusual items sometimes dampens our enthusiasm. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. Which is hardly surprising, given the name. Eagle Eye Solutions Group had a rather significant contribution from unusual items relative to its profit to December 2024. As a result, we can surmise that the unusual items are making its statutory profit significantly stronger than it would otherwise be.
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 Eagle Eye Solutions Group received a tax benefit of UK£5.2m. 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. And since it previously lost money, it may well simply indicate the realisation of past tax losses. However, the devil in the detail is that these kind of benefits only impact in the year they are booked, and are often one-off in nature. 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 Eagle Eye Solutions Group's Profit Performance
In its last report Eagle Eye Solutions Group received a tax benefit which might make its profit look better than it really is on a underlying level. Furthermore, it also benefitted from a positive unusual item, which boosted the profit result even higher. On reflection, the above-mentioned factors give us the strong impression that Eagle Eye Solutions Group'sunderlying earnings power is not as good as it might seem, based on the statutory profit numbers. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. Be aware that Eagle Eye Solutions Group is showing 3 warning signs in our investment analysis and 1 of those is a bit concerning...