Shareholders Shouldn’t Be Too Comfortable With Mazarin's (CVE:MAZ.H) Strong Earnings

After announcing healthy earnings, Mazarin Inc.'s (CVE:MAZ.H) stock rose over the last week. Despite the strong profit numbers, we believe that there are some deeper issues which investors should look into.

Check out our latest analysis for Mazarin

Operating Revenue Or Not?

Most companies divide classify their revenue as either 'operating revenue', which comes from normal operations, and other revenue, which could include government grants, for example. Oftentimes, non-operating revenue spikes are not repeated, so it makes sense to be cautious where non-operating revenue has made a very large contribution to total profit. Importantly, the non-operating revenue often comes without associated ongoing costs, so it can boost profit by letting it fall straight to the bottom line, making the operating business seem better than it really is. Notably, Mazarin had a significant increase in non-operating revenue over the last year. Indeed, its non-operating revenue rose from CA$151.0k last year to CA$2.13m this year. The high levels of non-operating revenue are problematic because if (and when) they do not repeat, then overall revenue (and profitability) of the firm will fall. In order to better understand a company's profit result, it can sometimes help to consider whether the result would be very different without a sudden increase in non-operating revenue.

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

How Do Unusual Items Influence Profit?

As well as that spike in non-operating revenue, we should also consider the CA$765k boost to profit coming from unusual items, over the last year. While it's always nice to have higher profit, a large contribution from unusual items sometimes dampens our enthusiasm. We ran the numbers on most publicly listed companies worldwide, and it's very common for unusual items to be once-off in nature. And that's as you'd expect, given these boosts are described as 'unusual'. Mazarin had a rather significant contribution from unusual items relative to its profit to December 2023. All else being equal, this would likely have the effect of making the statutory profit a poor guide to underlying earnings power.

Our Take On Mazarin's Profit Performance

In its last report Mazarin benefitted from a spike in non-operating revenue which may have boosted its profit in a way that may be no more sustainable than low quality coal mining. Furthermore, unusual items also made a nice positive contribution to its profit, which may well drop next year (all else being equal) if these phenomena are not repeated. Considering all this we'd argue Mazarin's profits probably give an overly generous impression of its sustainable level of profitability. If you want to do dive deeper into Mazarin, you'd also look into what risks it is currently facing. For example, Mazarin has 4 warning signs (and 2 which make us uncomfortable) we think you should know about.

Our examination of Mazarin has focussed on certain factors that can make its earnings look better than they are. And, on that basis, we are somewhat skeptical. 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. 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.