We're Not Counting On DEMIRE Deutsche Mittelstand Real Estate (ETR:DMRE) To Sustain Its Statutory Profitability

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 DEMIRE Deutsche Mittelstand Real Estate (ETR:DMRE).

While DEMIRE Deutsche Mittelstand Real Estate was able to generate revenue of €175.7m in the last twelve months, we think its profit result of €57.8m was more important. In the chart below, you can see that its profit and revenue have both grown over the last three years.

View our latest analysis for DEMIRE Deutsche Mittelstand Real Estate

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 and a spike in non operating revenue have impacted DEMIRE Deutsche Mittelstand Real Estate's most recent results. That might leave you wondering what analysts are forecasting in terms of future profitability. Luckily, you can click here to see an interactive graph depicting future profitability, based on their estimates.

Operating Revenue Or Not?

Companies will classify their revenue streams as either operating revenue or other revenue. 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. It's worth noting that DEMIRE Deutsche Mittelstand Real Estate saw a big increase in non-operating revenue over the last year. In fact, our data indicates that non-operating revenue increased from €124.5m to €175.7m. If that non-operating revenue fails to manifest in the current year, then there's a real risk the bottom line profit result will be impacted negatively. 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.

How Do Unusual Items Influence Profit?

Alongside that spike in non-operating revenue, it's also important to note that DEMIRE Deutsche Mittelstand Real Estate'sprofit was boosted by unusual items worth €22m 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'. We can see that DEMIRE Deutsche Mittelstand Real Estate's positive unusual items were quite significant relative to its profit in the year to September 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 DEMIRE Deutsche Mittelstand Real Estate's Profit Performance

In its last report DEMIRE Deutsche Mittelstand Real Estate 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 DEMIRE Deutsche Mittelstand Real Estate's profits probably give an overly generous impression of its sustainable level of profitability. So while earnings quality is important, it's equally important to consider the risks facing DEMIRE Deutsche Mittelstand Real Estate at this point in time. For example, we've found that DEMIRE Deutsche Mittelstand Real Estate has 4 warning signs (1 is significant!) that deserve your attention before going any further with your analysis.

Our examination of DEMIRE Deutsche Mittelstand Real Estate 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. 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.

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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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