Why Medicamen Biotech's (NSE:MEDICAMEQ) Shaky Earnings Are Just The Beginning Of Its Problems

A lackluster earnings announcement from Medicamen Biotech Limited (NSE:MEDICAMEQ) last week didn't sink the stock price. However, we believe that investors should be aware of some underlying factors which may be of concern.

Check out our latest analysis for Medicamen Biotech

Operating Revenue Or Not?

Most companies divide classify their revenue as either 'operating revenue', which comes from normal operations, and other revenue, which could include government grants, for example. 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 Medicamen Biotech saw a big increase in non-operating revenue over the last year. In fact, our data indicates that non-operating revenue increased from ₹19.9m to ₹71.5m. 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 Medicamen Biotech.

Our Take On Medicamen Biotech's Profit Performance

As discussed above, Medicamen Biotech's sharp increase in non-operating revenue boosted its profit over the last year, and if that non-operating revenue is not repeated, then the trailing twelve months profit probably isn't as good as it seems. Therefore, it seems possible to us that Medicamen Biotech's true underlying earnings power is actually less than its statutory profit. But at least holders can take some solace from the 6.0% per annum growth in EPS for the last three. The goal of this article has been to assess how well we can rely on the statutory earnings to reflect the company's potential, but there is plenty more to consider. So while earnings quality is important, it's equally important to consider the risks facing Medicamen Biotech at this point in time. In terms of investment risks, we've identified 2 warning signs with Medicamen Biotech, and understanding these bad boys should be part of your investment process.

This note has only looked at a single factor that sheds light on the nature of Medicamen Biotech's profit. But there are plenty of other ways to inform your opinion of a company. For example, many people consider a high return on equity as an indication of favorable business economics, while others like to 'follow the money' and search out stocks that insiders are buying. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.

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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.