Investors Shouldn't Be Too Comfortable With Polski Holding Nieruchomosci's (WSE:PHN) Earnings

Polski Holding Nieruchomosci S.A. (WSE:PHN) announced strong profits, but the stock was stagnant. Our analysis suggests that shareholders have noticed something concerning in the numbers.

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Operating Revenue Or Not?

Companies will classify their revenue streams as either operating revenue or other 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. However, we note that when non-operating revenue increases suddenly, it will sometimes generate an unsustainable boost to profit. Notably, Polski Holding Nieruchomosci had a significant increase in non-operating revenue over the last year. In fact, our data indicates that non-operating revenue increased from zł345.2m to zł681.6m. 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.

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.

How Do Unusual Items Influence Profit?

On top of the non-operating revenue spike, we should also consider the zł75m impact of unusual items in the last year, which had the effect of suppressing profit. It's never great to see unusual items costing the company profits, but on the upside, things might improve sooner rather than later. We looked at thousands of listed companies and found that unusual items are very often one-off in nature. And that's hardly a surprise given these line items are considered unusual. Assuming those unusual expenses don't come up again, we'd therefore expect Polski Holding Nieruchomosci to produce a higher profit next year, all else being equal.

Our Take On Polski Holding Nieruchomosci's Profit Performance

In the last year Polski Holding Nieruchomosci's non-operating revenue really gave it a boost, but not in a way that is necessarily going to be sustained. But on the other hand, it also saw an unusual item depress its profit, suggesting the statutory profit number will actually improve next year, if the unusual expenses are not repeated, and all else stays equal. Based on these factors, we think it's very unlikely that Polski Holding Nieruchomosci's statutory profits make it seem much weaker than it is. If you'd like to know more about Polski Holding Nieruchomosci as a business, it's important to be aware of any risks it's facing. Be aware that Polski Holding Nieruchomosci is showing 3 warning signs in our investment analysis and 2 of those make us uncomfortable...

In this article we've looked at a number of factors that can impair the utility of profit numbers, as a guide to a business. 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 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.