Teixeira Duarte's (ELI:TDSA) Earnings Are Of Questionable Quality

Teixeira Duarte, S.A.'s (ELI:TDSA) stock was strong after they recently reported robust earnings. However, we think that shareholders may be missing some concerning details in the numbers.

We've discovered 3 warning signs about Teixeira Duarte. View them for free.

Operating Revenue Or Not?

Companies will classify their revenue streams as either operating revenue or other revenue. Where possible, we prefer rely on operating revenue to get a better understanding of how the business is functioning. However, we note that when non-operating revenue increases suddenly, it will sometimes generate an unsustainable boost to profit. Notably, Teixeira Duarte had a significant increase in non-operating revenue over the last year. Indeed, its non-operating revenue rose from €11.7m last year to €68.2m 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 Teixeira Duarte.

How Do Unusual Items Influence Profit?

Alongside that spike in non-operating revenue, it's also important to note that Teixeira Duarte'sprofit suffered from unusual items, which reduced profit by €9.3m in the last twelve months. It's never great to see unusual items costing the company profits, but on the upside, things might improve sooner rather than later. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. And, after all, that's exactly what the accounting terminology implies. Assuming those unusual expenses don't come up again, we'd therefore expect Teixeira Duarte to produce a higher profit next year, all else being equal.

Our Take On Teixeira Duarte's Profit Performance

In its last report Teixeira Duarte 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. 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. Having considered these factors, we don't think Teixeira Duarte's statutory profits give an overly harsh view of the business. If you'd like to know more about Teixeira Duarte as a business, it's important to be aware of any risks it's facing. To that end, you should learn about the 3 warning signs we've spotted with Teixeira Duarte (including 2 which are potentially serious).

Our examination of Teixeira Duarte has focussed on certain factors that can make its earnings look better than they are. 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.