Maxposure's (NSE:MAXPOSURE) Earnings Might Be Weaker Than You Think

Shareholders didn't seem to be thrilled with Maxposure Limited's (NSE:MAXPOSURE) recent earnings report, despite healthy profit numbers. Our analysis suggests they may be concerned about some underlying details.

Check out our latest analysis for Maxposure

The Power Of Non-Operating Revenue

At most companies, some revenue streams, such as government grants, are accounted for as non-operating revenue, while the core business is said to produce operating revenue. Generally speaking, operating revenue is a more reliable guide to the sustainable revenue generating capacity of the business. Importantly, the non-operating revenue often comes without associated ongoing costs, so it can boost profit by letting it fall straight to the bottom line, making the operating business seem better than it really is. It's worth noting that Maxposure saw a big increase in non-operating revenue over the last year. Indeed, its non-operating revenue rose from -₹77.4m last year to -₹1.0k this year. 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. 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 Maxposure.

How Do Unusual Items Influence Profit?

As well as that spike in non-operating revenue, we should also consider the ₹7.8m 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'. If Maxposure 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 Maxposure's Profit Performance

In its last report Maxposure 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. 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 Maxposure's statutory profits might make it look better than it really is on an underlying level. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. While conducting our analysis, we found that Maxposure has 2 warning signs and it would be unwise to ignore them.

Our examination of Maxposure 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. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks with high insider ownership.

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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.