Scandinavian Investment Group's (CPH:SIG) Earnings Are Of Questionable Quality

Scandinavian Investment Group A/S' (CPH:SIG) robust earnings report didn't manage to move the market for its stock. We did some digging, and we found some concerning factors in the details.

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Operating Revenue Or Not?

At most companies, some revenue streams, such as government grants, are accounted for as non-operating revenue, while the core business is said to produce operating 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. However, we note that when non-operating revenue increases suddenly, it will sometimes generate an unsustainable boost to profit. It's worth noting that Scandinavian Investment Group saw a big increase in non-operating revenue over the last year. In fact, our data indicates that non-operating revenue increased from kr.13.4m to kr.18.7m. 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 Scandinavian Investment Group.

How Do Unusual Items Influence Profit?

Alongside that spike in non-operating revenue, it's also important to note that Scandinavian Investment Group'sprofit suffered from unusual items, which reduced profit by kr.17m in the last twelve months. While deductions due to unusual items are disappointing in the first instance, there is a silver lining. 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. In the twelve months to December 2024, Scandinavian Investment Group had a big unusual items expense. All else being equal, this would likely have the effect of making the statutory profit look worse than its underlying earnings power.

An Unusual Tax Situation

Moving on from the unusual items and the non-operating revenue, we note that Scandinavian Investment Group profited from a tax benefit which contributedkr.3.7m to profit. This is of course a bit out of the ordinary, given it is more common for companies to be paying tax than receiving tax benefits! The receipt of a tax benefit is obviously a good thing, on its own. However, our data indicates that tax benefits can temporarily boost statutory profit in the year it is booked, but subsequently profit may fall back. In the likely event the tax benefit is not repeated, we'd expect to see its statutory profit levels drop, at least in the absence of strong growth. So while we think it's great to receive a tax benefit, it does tend to imply an increased risk that the statutory profit overstates the sustainable earnings power of the business.

Our Take On Scandinavian Investment Group's Profit Performance

In the last year Scandinavian Investment Group'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, its profit was boosted by a tax benefit! But on the other hand, it also saw an unusual item depress its profit. Based on these factors, we think that Scandinavian Investment Group's statutory profits probably make it seem better than it is on an underlying level. So while earnings quality is important, it's equally important to consider the risks facing Scandinavian Investment Group at this point in time. For example, we've discovered 3 warning signs that you should run your eye over to get a better picture of Scandinavian Investment Group.

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 are plenty of other ways to inform your opinion of a company. 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 with high insider ownership.

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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.