Shareholders In Alrov Properties and Lodgings (TLV:ALRPR) Should Look Beyond Earnings For The Full Story

Despite posting strong earnings, Alrov Properties and Lodgings Ltd.'s (TLV:ALRPR) stock didn't move much over the last week. We looked deeper into the numbers and found that shareholders might be concerned with some underlying weaknesses.

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Operating Revenue Or Not?

Companies will classify their revenue streams as either operating revenue or other revenue. Generally speaking, operating revenue is a more reliable guide to the sustainable revenue generating capacity of the business. However, we note that when non-operating revenue increases suddenly, it will sometimes generate an unsustainable boost to profit. Notably, Alrov Properties and Lodgings had a significant increase in non-operating revenue over the last year. In fact, our data indicates that non-operating revenue increased from ₪131.5m to ₪1.50b. 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 Alrov Properties and Lodgings.

How Do Unusual Items Influence Profit?

As well as that spike in non-operating revenue, we should also consider the ₪252m boost to profit coming from unusual items, over the last year. While it's always nice to have higher profit, a large contribution from unusual items sometimes dampens our enthusiasm. 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 Alrov Properties and Lodgings doesn't see that contribution repeat, then all else being equal we'd expect its profit to drop over the current year.

Our Take On Alrov Properties and Lodgings' Profit Performance

In its last report Alrov Properties and Lodgings benefitted from a spike in non-operating revenue which may have boosted its profit in a way that may be no more sustainable than low quality coal mining. And on top of that, it also saw an unusual item boost its profit, suggesting that next year might see a lower profit number, if these events are not repeated and everything else is equal. For the reasons mentioned above, we think that a perfunctory glance at Alrov Properties and Lodgings' statutory profits might make it look better than it really is on an underlying level. If you'd like to know more about Alrov Properties and Lodgings as a business, it's important to be aware of any risks it's facing. In terms of investment risks, we've identified 1 warning sign with Alrov Properties and Lodgings, and understanding this should be part of your investment process.

Our examination of Alrov Properties and Lodgings has focussed on certain factors that can make its earnings look better than they are. And, on that basis, we are somewhat skeptical. But there is always more to discover if you are capable of focussing your mind on minutiae. 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 with significant insider holdings 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.