Why Südwestdeutsche Salzwerke's (FRA:SSH) Healthy Earnings Aren’t As Good As They Seem

Following the release of a positive earnings report recently, Südwestdeutsche Salzwerke AG's (FRA:SSH) stock performed well. However, we think that investors should be cautious when interpreting the profit numbers.

Check out our latest analysis for Südwestdeutsche Salzwerke

The Power Of Non-Operating Revenue

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. Where possible, we prefer rely on operating revenue to get a better understanding of how the business is functioning. However, we note that when non-operating revenue increases suddenly, it will sometimes generate an unsustainable boost to profit. It's worth noting that Südwestdeutsche Salzwerke saw a big increase in non-operating revenue over the last year. In fact, our data indicates that non-operating revenue increased from -€1.85m to €17.3m. 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 Südwestdeutsche Salzwerke.

How Do Unusual Items Influence Profit?

Alongside that spike in non-operating revenue, it's also important to note that Südwestdeutsche Salzwerke'sprofit was boosted by unusual items worth €29m in the last twelve months. 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. And that's as you'd expect, given these boosts are described as 'unusual'. Südwestdeutsche Salzwerke had a rather significant contribution from unusual items relative to its profit to December 2020. As a result, we can surmise that the unusual items are making its statutory profit significantly stronger than it would otherwise be.

Our Take On Südwestdeutsche Salzwerke's Profit Performance

In the last year Südwestdeutsche Salzwerke's non-operating revenue really gave it a boost, but not in a way that is necessarily going to be sustained. And on top of that, it also saw an unusual item boost its profit, suggesting that next year might see a lower profit number, if these events are not repeated and everything else is equal. For the reasons mentioned above, we think that a perfunctory glance at Südwestdeutsche Salzwerke's statutory profits might make it look better than it really is on an underlying level. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. For example, we've found that Südwestdeutsche Salzwerke has 3 warning signs (1 is concerning!) that deserve your attention before going any further with your analysis.

In this article we've looked at a number of factors that can impair the utility of profit numbers, and we've come away cautious. 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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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. 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.
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