Airport City's (TLV:ARPT) Earnings Are Weaker Than They Seem

Airport City Ltd.'s (TLV:ARPT) 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?

Companies will classify their revenue streams as either operating revenue or other 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 Airport City saw a big increase in non-operating revenue over the last year. Indeed, its non-operating revenue rose from ₪99.4m last year to ₪154.3m this year. If that non-operating revenue fails to manifest in the current year, then there's a real risk the bottom line profit result will be impacted negatively. Sometimes, you can get a better idea of the underlying earnings potential of a company by excluding unusual boosts to non-operating revenue.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Airport City.

The Impact Of Unusual Items On Profit

As well as that spike in non-operating revenue, we should also consider the ₪110m boost to profit coming from unusual items, over the last year. While we like to see profit increases, we tend to be a little more cautious when unusual items have made a big contribution. 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'. If Airport City 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 Airport City's Profit Performance

In the last year Airport City's non-operating revenue really gave it a boost, but not in a way that is necessarily going to be sustained. Furthermore, unusual items also made a nice positive contribution to its profit, which may well drop next year (all else being equal) if these phenomena are not repeated. For the reasons mentioned above, we think that a perfunctory glance at Airport City's statutory profits might make it look better than it really is on an underlying level. If you want to do dive deeper into Airport City, you'd also look into what risks it is currently facing. You'd be interested to know, that we found 2 warning signs for Airport City and you'll want to know about them.

Our examination of Airport City 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.