Redcentric's (LON:RCN) Earnings Are Of Questionable Quality

By
Simply Wall St
Published
August 15, 2021
AIM:RCN
Source: Shutterstock

Redcentric plc (LON:RCN) announced strong profits, but the stock was stagnant. We did some digging, and we found some concerning factors in the details.

View our latest analysis for Redcentric

earnings-and-revenue-history
AIM:RCN Earnings and Revenue History August 16th 2021

How Do Unusual Items Influence Profit?

Importantly, our data indicates that Redcentric's profit received a boost of UK£4.5m 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. We ran the numbers on most publicly listed companies worldwide, and it's very common for unusual items to be once-off in nature. And that's as you'd expect, given these boosts are described as 'unusual'. We can see that Redcentric's positive unusual items were quite significant relative to its profit in the year to March 2021. 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 Redcentric's Profit Performance

As we discussed above, we think the significant positive unusual item makes Redcentric's earnings a poor guide to its underlying profitability. For this reason, we think that Redcentric's statutory profits may be a bad guide to its underlying earnings power, and might give investors an overly positive impression of the company. On the bright side, the company showed enough improvement to book a profit this year, after losing money last year. 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 Redcentric at this point in time. Every company has risks, and we've spotted 3 warning signs for Redcentric (of which 1 shouldn't be ignored!) you should know about.

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