Norsk Hydro's (OB:NHY) Soft Earnings Are Actually Better Than They Appear

Shareholders appeared unconcerned with Norsk Hydro ASA's (OB:NHY) lackluster earnings report last week. We did some digging, and we believe the earnings are stronger than they seem.

View our latest analysis for Norsk Hydro

The Impact Of Unusual Items On Profit

For anyone who wants to understand Norsk Hydro's profit beyond the statutory numbers, it's important to note that during the last twelve months statutory profit was reduced by kr4.3b due to unusual items. While deductions due to unusual items are disappointing in the first instance, there is a silver lining. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. And that's hardly a surprise given these line items are considered unusual. If Norsk Hydro doesn't see those unusual expenses repeat, then all else being equal we'd expect its profit to increase over the coming year.

That might leave you wondering what analysts are forecasting in terms of future profitability. Luckily, you can click here to see an interactive graph depicting future profitability, based on their estimates.

Our Take On Norsk Hydro's Profit Performance

Because unusual items detracted from Norsk Hydro's earnings over the last year, you could argue that we can expect an improved result in the current quarter. Based on this observation, we consider it likely that Norsk Hydro's statutory profit actually understates its earnings potential! Unfortunately, though, its earnings per share actually fell back over the 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 while earnings quality is important, it's equally important to consider the risks facing Norsk Hydro at this point in time. You'd be interested to know, that we found 3 warning signs for Norsk Hydro and you'll want to know about these bad boys.

Today we've zoomed in on a single data point to better understand the nature of Norsk Hydro's profit. But there is always more to discover if you are capable of focussing your mind on minutiae. 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. 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. 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.