Are AUDI’s (ETR:NSU) Statutory Earnings A Good Reflection Of Its Earnings Potential?

Many investors consider it preferable to invest in profitable companies over unprofitable ones, because profitability suggests a business is sustainable. Having said that, sometimes statutory profit levels are not a good guide to ongoing profitability, because some short term one-off factor has impacted profit levels. In this article, we’ll look at how useful this year’s statutory profit is, when analysing AUDI (ETR:NSU).

While AUDI was able to generate revenue of €56.8b in the last twelve months, we think its profit result of €3.02b was more important. The chart below shows that both revenue and profit have declined over the last three years.

View our latest analysis for AUDI

XTRA:NSU Income Statement, January 10th 2020
XTRA:NSU Income Statement, January 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. This article will discuss how unusual items have impacted AUDI’s most recent profit results. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of AUDI.

How Do Unusual Items Influence Profit?

Importantly, our data indicates that AUDI’s profit was reduced by €1.5b, due to unusual items, over the last year. It’s never great to see unusual items costing the company profits, but on the upside, things might improve sooner rather than later. We looked at thousands of listed companies and found that unusual items are very often one-off in nature. And that’s hardly a surprise given these line items are considered unusual. Assuming those unusual expenses don’t come up again, we’d therefore expect AUDI to produce a higher profit next year, all else being equal.

Our Take On AUDI’s Profit Performance

Because unusual items detracted from AUDI’s earnings over the last year, you could argue that we can expect an improved result in the current quarter. Based on this observation, we consider it likely that AUDI’s statutory profit actually understates its earnings potential! On the other hand, its EPS actually shrunk in the last twelve months. At the end of the day, it’s essential to consider more than just the factors above, if you want to understand the company properly. While it’s very important to consider the profit and loss statement, you can also learn a lot about a company by looking at its balance sheet. You can seeour latest analysis on AUDI’s balance sheet health here.

This note has only looked at a single factor that sheds light on the nature of AUDI’s profit. But there are plenty of other ways to inform your opinion of a company. 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. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.

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.