We Wouldn't Rely On Oswal Agro Mills's (NSE:OSWALAGRO) Statutory Earnings As A Guide

Broadly speaking, profitable businesses are less risky than unprofitable ones. 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 Oswal Agro Mills' (NSE:OSWALAGRO) statutory profits are a good guide to its underlying earnings.

We like the fact that Oswal Agro Mills made a profit of ₹302.9m on its revenue of ₹445.1m, in the last year. Happily, it has grown both its profit and revenue over the last three years (though we note its profit is down over the last year).

See our latest analysis for Oswal Agro Mills

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. We therefore think it is well worthwhile to discuss how a recent spike in Oswal Agro Mills' non-operating revenue has shaped its statutory profit result. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Oswal Agro Mills.

Operating Revenue Or Not?

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. 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. 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 Oswal Agro Mills saw a big increase in non-operating revenue over the last year. In fact, our data indicates that non-operating revenue increased from ₹128.2m to ₹445.1m. The high levels of non-operating 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.

Our Take On Oswal Agro Mills' Profit Performance

Since Oswal Agro Mills saw a big increase in its non-operating revenue over the last twelve months, we'd be very cautious about relying too heavily on the statutory profit number, which would have benefitted from this potentially unsustainable change. For this reason, we think that Oswal Agro Mills' statutory profits may be a bad guide to its underlying earnings power, and might give investors an overly positive impression of the company. In further bad news, its earnings per share decreased in the last year. Of course, we've only just scratched the surface when it comes to analysing its earnings; one could also consider margins, forecast growth, and return on investment, among other factors. In light of this, if you'd like to do more analysis on the company, it's vital to be informed of the risks involved. Case in point: We've spotted 2 warning signs for Oswal Agro Mills you should be aware of.

This note has only looked at a single factor that sheds light on the nature of Oswal Agro Mills' profit. 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 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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