We're Not Counting On Priortech (TLV:PRTC) To Sustain Its Statutory Profitability

Broadly speaking, profitable businesses are less risky than unprofitable ones. That said, the current statutory profit is not always a good guide to a company's underlying profitability. This article will consider whether Priortech's (TLV:PRTC) statutory profits are a good guide to its underlying earnings.

It's good to see that over the last twelve months Priortech made a profit of US$5.61m on revenue of US$7.98m. Even though revenue is down over the last three years, you can see in the chart below that the company has moved from loss-making to profitable.

Check out our latest analysis for Priortech

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. Today, we'll look at how the recent spike in non-operating revenue has impacted Priortech's most recent results. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Priortech.

The Power Of Non-Operating Revenue

Companies will classify their revenue streams as either operating revenue or other revenue. Where possible, we prefer rely on operating revenue to get a better understanding of how the business is functioning. However, we note that when non-operating revenue increases suddenly, it will sometimes generate an unsustainable boost to profit. It's worth noting that Priortech saw a big increase in non-operating revenue over the last year. Indeed, its non-operating revenue spiked from US$2.69m last year to US$7.98m 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. 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.

Our Take On Priortech's Profit Performance

Because Priortech's non-operating revenue spiked quite noticeably last year, you could argue that a focus on statutory profit would be too generous because profits may drop back in the future (when that non-operating revenue is not repeated). For this reason, we think that Priortech'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. At the end of the day, it's essential to consider more than just the factors above, if you want to understand the company properly. So if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. Case in point: We've spotted 2 warning signs for Priortech you should be aware of.

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