We Wouldn't Rely On Donegal Investment Group's (ISE:DQ7A) Statutory Earnings As A Guide

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 Donegal Investment Group (ISE:DQ7A).

It's good to see that over the last twelve months Donegal Investment Group made a profit of €1.96m on revenue of €45.0m. The chart below shows that both revenue and profit have declined over the last three years.

See our latest analysis for Donegal Investment Group

Importantly, statutory profits are not always the best tool for understanding a company's true earnings power, so it's well worth examining profits in a little more detail. This article will focus on the impact unusual items have had on Donegal Investment Group's statutory earnings. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Donegal Investment Group.

How Do Unusual Items Influence Profit?

Importantly, our data indicates that Donegal Investment Group's profit received a boost of €618k 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. And that's as you'd expect, given these boosts are described as 'unusual'. Donegal Investment Group had a rather significant contribution from unusual items relative to its profit to August 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 Donegal Investment Group's Profit Performance

As we discussed above, we think the significant positive unusual item makes Donegal Investment Group'searnings a poor guide to its underlying profitability. As a result, we think it may well be the case that Donegal Investment Group's underlying earnings power is lower than its statutory profit. But the good news is that its EPS growth over the last three years has been very impressive. 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 Donegal Investment Group at this point in time. Case in point: We've spotted 3 warning signs for Donegal Investment Group you should be aware of.

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