Stock Analysis

Entain's (LON:ENT) Solid Earnings May Rest On Weak Foundations

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LSE:ENT
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Entain Plc's (LON:ENT) healthy profit numbers didn't contain any surprises for investors. We believe that shareholders have noticed some concerning factors beyond the statutory profit numbers.

View our latest analysis for Entain

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LSE:ENT Earnings and Revenue History April 6th 2021

The Impact Of Unusual Items On Profit

For anyone who wants to understand Entain's profit beyond the statutory numbers, it's important to note that during the last twelve months statutory profit gained from UK£131m worth of unusual items. 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. We can see that Entain's positive unusual items were quite significant relative to its profit in the year to December 2020. As a result, we can surmise that the unusual items are making its statutory profit significantly stronger than it would otherwise be.

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 Entain's Profit Performance

As previously mentioned, Entain's large boost from unusual items won't be there indefinitely, so its statutory earnings are probably a poor guide to its underlying profitability. For this reason, we think that Entain's statutory profits may be a bad guide to its underlying earnings power, and might give investors an overly positive impression of the company. The good news is that it earned a profit in the last twelve months, despite its previous loss. The goal of this article has been to assess how well we can rely on the statutory earnings to reflect the company's potential, but there is plenty more to consider. So while earnings quality is important, it's equally important to consider the risks facing Entain at this point in time. Every company has risks, and we've spotted 3 warning signs for Entain you should know about.

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