Are Cofina SGPS's (ELI:CFN) Statutory Earnings A Good Reflection Of Its Earnings Potential?

It might be old fashioned, but we really like to invest in companies that make a profit, each and every year. 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. Today we'll focus on whether this year's statutory profits are a good guide to understanding Cofina SGPS (ELI:CFN).

It's good to see that over the last twelve months Cofina SGPS made a profit of €2.88m on revenue of €79.4m. As depicted below, while its revenue may have fallen over the last few years, its profit actually improved.

See our latest analysis for Cofina SGPS

Of course, it is only sensible to look beyond the statutory profits and question how well those numbers represent the sustainable earnings power of the business. Today, we'll look at how the recent spike in non-operating revenue has impacted Cofina SGPS' most recent results. 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.

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. 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 Cofina SGPS saw a big increase in non-operating revenue over the last year. Indeed, its non-operating revenue spiked from €87.6m last year to €79.4m this year. 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. Sometimes, you can get a better idea of the underlying earnings potential of a company by excluding unusual boosts to non-operating revenue.

Our Take On Cofina SGPS' Profit Performance

As discussed above, Cofina SGPS' 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 goood as it seems. Therefore, it seems possible to us that Cofina SGPS' true underlying earnings power is actually less than its statutory profit. But at least holders can take some solace from the 12% per annum growth in EPS for the last three. 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 Cofina SGPS at this point in time. Be aware that Cofina SGPS is showing 3 warning signs in our investment analysis and 1 of those makes us a bit uncomfortable...

This note has only looked at a single factor that sheds light on the nature of Cofina SGPS' 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. 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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