We Think Eisen- und Hüttenwerke's (FRA:EIS) Statutory Profit Might Understate 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. This article will consider whether Eisen- und Hüttenwerke's (FRA:EIS) statutory profits are a good guide to its underlying earnings.

We like the fact that Eisen- und Hüttenwerke made a profit of €6.50m on its revenue of €144.0k, in the last year. Below, you can see that both its revenue and its profit have fallen over the last three years.

See our latest analysis for Eisen- und Hüttenwerke

Of course, when it comes to statutory profit, the devil is often in the detail, and we can get a better sense for a company by diving deeper into the financial statements. This article will focus on the impact unusual items have had on Eisen- und Hüttenwerke's statutory earnings. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Eisen- und Hüttenwerke.

How Do Unusual Items Influence Profit?

For anyone who wants to understand Eisen- und Hüttenwerke's profit beyond the statutory numbers, it's important to note that during the last twelve months statutory profit was reduced by €1.0m due to unusual items. 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. Eisen- und Hüttenwerke took a rather significant hit from unusual items in the year to September 2020. As a result, we can surmise that the unusual items made its statutory profit significantly weaker than it would otherwise be.

Our Take On Eisen- und Hüttenwerke's Profit Performance

As we mentioned previously, the Eisen- und Hüttenwerke's profit was hampered by unusual items in the last year. Based on this observation, we consider it possible that Eisen- und Hüttenwerke's statutory profit actually understates its earnings potential! Unfortunately, though, its earnings per share actually fell back over the last year. 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. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. For instance, we've identified 4 warning signs for Eisen- und Hüttenwerke (2 are concerning) you should be familiar with.

This note has only looked at a single factor that sheds light on the nature of Eisen- und Hüttenwerke's profit. But there are plenty of other ways to inform your opinion of a company. 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. 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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