Novozymes' (CPH:NZYM B) Profits Appear To Have Quality Issues

The recent earnings posted by Novozymes A/S (CPH:NZYM B) were solid, but the stock didn't move as much as we expected. We believe that shareholders have noticed some concerning factors beyond the statutory profit numbers.

View our latest analysis for Novozymes

The Impact Of Unusual Items On Profit

Importantly, our data indicates that Novozymes' profit received a boost of kr.595m in unusual items, over the last year. 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. Which is hardly surprising, given the name. If Novozymes doesn't see that contribution repeat, then all else being equal we'd expect its profit to drop over the current year.

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.

Our Take On Novozymes' Profit Performance

Arguably, Novozymes' statutory earnings have been distorted by unusual items boosting profit. Therefore, it seems possible to us that Novozymes' true underlying earnings power is actually less than its statutory profit. But at least holders can take some solace from the 20% per annum growth in EPS for the last three. At the end of the day, it's essential to consider more than just the factors above, if you want to understand the company properly. So while earnings quality is important, it's equally important to consider the risks facing Novozymes at this point in time. For example, we've discovered 1 warning sign that you should run your eye over to get a better picture of Novozymes.

Today we've zoomed in on a single data point to better understand the nature of Novozymes' 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. 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.