Statistically speaking, it is less risky to invest in profitable companies than in unprofitable ones. That said, the current statutory profit is not always a good guide to a company's underlying profitability. In this article, we'll look at how useful this year's statutory profit is, when analysing Deutsche Wohnen (ETR:DWNI).
We like the fact that Deutsche Wohnen made a profit of €1.21b on its revenue of €2.52b, in the last year. As you can see in the chart below, its profit has declined over the last three years, even though its revenue has increased.
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 Deutsche Wohnen'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.
The Power Of Non-Operating Revenue
Companies will classify their revenue streams as either operating revenue or other revenue. 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 Deutsche Wohnen saw a big increase in non-operating revenue over the last year. In fact, our data indicates that non-operating revenue increased from €1.65b to €2.52b. The high levels of non-operating are problematic because if (and when) they do not repeat, then overall revenue (and profitability) of the firm will fall. Sometimes, you can get a better idea of the underlying earnings potential of a company by excluding unusual boosts to non-operating revenue.
The Impact Of Unusual Items On Profit
Alongside that spike in non-operating revenue, it's also important to note that Deutsche Wohnen'sprofit was boosted by unusual items worth €1.1b in the last twelve months. While it's always nice to have higher profit, a large contribution from unusual items sometimes dampens our enthusiasm. 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 Deutsche Wohnen'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 Deutsche Wohnen's Profit Performance
In its last report Deutsche Wohnen 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. 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 all the reasons mentioned above, we think that, at a glance, Deutsche Wohnen's statutory profits could be considered to be low quality, because they are likely to give investors an overly positive impression of the company. If you want to do dive deeper into Deutsche Wohnen, you'd also look into what risks it is currently facing. Our analysis shows 4 warning signs for Deutsche Wohnen (2 make us uncomfortable!) and we strongly recommend you look at these before investing.
Our examination of Deutsche Wohnen 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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