We Wouldn't Rely On Villar International's (TLV:VILR) Statutory Earnings As A Guide

Many investors consider it preferable to invest in profitable companies over unprofitable ones, because profitability suggests a business is sustainable. Having said that, sometimes statutory profit levels are not a good guide to ongoing profitability, because some short term one-off factor has impacted profit levels. This article will consider whether Villar International's (TLV:VILR) statutory profits are a good guide to its underlying earnings.

While Villar International was able to generate revenue of ₪474.3m in the last twelve months, we think its profit result of ₪187.4m was more important. In the chart below, you can see that its profit and revenue have both grown over the last three years.

Check out our latest analysis for Villar International

Not all profits are equal, and we can learn more about the nature of a company's past profitability by diving deeper into the financial statements. This article, will discuss how unusual items and a spike in non operating revenue have impacted Villar International's most recent results. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Villar International.

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, Villar International had a significant increase in non-operating revenue over the last year. Indeed, its non-operating revenue spiked from ₪424.3m last year to ₪474.3m 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.

How Do Unusual Items Influence Profit?

As well as that spike in non-operating revenue, we should also consider the ₪68m 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 crunched the numbers on thousands of publicly listed companies, we found that a boost from unusual items in a given year is often not repeated the next year. And that's as you'd expect, given these boosts are described as 'unusual'. We can see that Villar International's positive unusual items were quite significant relative to its profit in the year to September 2020. All else being equal, this would likely have the effect of making the statutory profit a poor guide to underlying earnings power.

Our Take On Villar International's Profit Performance

In the last year Villar International's non-operating revenue really gave it a boost, but not in a way that is necessarily going to be sustained. 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. Considering all this we'd argue Villar International's profits probably give an overly generous impression of its sustainable level of profitability. If you want to do dive deeper into Villar International, you'd also look into what risks it is currently facing. For example - Villar International has 1 warning sign we think you should be aware of.

Our examination of Villar International 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 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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