Robust Earnings May Not Tell The Whole Story For Otto Energy (ASX:OEL)

By
Simply Wall St
Published
March 21, 2022
ASX:OEL
Source: Shutterstock

Unsurprisingly, Otto Energy Limited's (ASX:OEL) stock price was strong on the back of its healthy earnings report. However, our analysis suggests that shareholders may be missing some factors that indicate the earnings result was not as good as it looked.

Check out our latest analysis for Otto Energy

earnings-and-revenue-history
ASX:OEL Earnings and Revenue History March 21st 2022

How Do Unusual Items Influence Profit?

Importantly, our data indicates that Otto Energy's profit received a boost of US$14m in unusual items, over the last year. We can't deny that higher profits generally leave us optimistic, but we'd prefer it if the profit were to be sustainable. 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. We can see that Otto Energy's positive unusual items were quite significant relative to its profit in the year to December 2021. All else being equal, this would likely have the effect of making the statutory profit a poor guide to underlying earnings power.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Otto Energy.

Our Take On Otto Energy's Profit Performance

As previously mentioned, Otto Energy's large boost from unusual items won't be there indefinitely, so its statutory earnings are probably a poor guide to its underlying profitability. As a result, we think it may well be the case that Otto Energy's underlying earnings power is lower than its statutory profit. The good news is that it earned a profit in the last twelve months, despite its previous loss. Of course, we've only just scratched the surface when it comes to analysing its earnings; one could also consider margins, forecast growth, and return on investment, among other factors. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. While conducting our analysis, we found that Otto Energy has 3 warning signs and it would be unwise to ignore these.

This note has only looked at a single factor that sheds light on the nature of Otto Energy's profit. But there is always more to discover if you are capable of focussing your mind on minutiae. Some people consider a high return on equity to be a good sign of a quality business. 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.

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