Why Mazaya Real Estate Development Q.P.S.C's (DSM:MRDS) Earnings Are Weaker Than They Seem

Despite posting strong earnings, Mazaya Real Estate Development Q.P.S.C.'s (DSM:MRDS) stock didn't move much over the last week. We think that investors might be worried about the foundations the earnings are built on.

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The Power Of Non-Operating Revenue

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. 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, Mazaya Real Estate Development Q.P.S.C had a significant increase in non-operating revenue over the last year. Indeed, its non-operating revenue rose from -ر.ق33.0m last year to ر.ق548.2k this year. 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. 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 Mazaya Real Estate Development Q.P.S.C.

How Do Unusual Items Influence Profit?

Alongside that spike in non-operating revenue, it's also important to note that Mazaya Real Estate Development Q.P.S.C'sprofit was boosted by unusual items worth ر.ق13m in the last twelve months. We can't deny that higher profits generally leave us optimistic, but we'd prefer it if the profit were to be sustainable. 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 items don't show up again in the current year, we'd thus expect profit to be weaker next year (in the absence of business growth, that is).

Our Take On Mazaya Real Estate Development Q.P.S.C's Profit Performance

In its last report Mazaya Real Estate Development Q.P.S.C 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. Furthermore, unusual items also made a nice positive contribution to its profit, which may well drop next year (all else being equal) if these phenomena are not repeated. Considering all this we'd argue Mazaya Real Estate Development Q.P.S.C's profits probably give an overly generous impression of its sustainable level of profitability. If you want to do dive deeper into Mazaya Real Estate Development Q.P.S.C, you'd also look into what risks it is currently facing. For example, we've found that Mazaya Real Estate Development Q.P.S.C has 2 warning signs (1 shouldn't be ignored!) that deserve your attention before going any further with your analysis.

In this article we've looked at a number of factors that can impair the utility of profit numbers, and we've come away cautious. But there are plenty of other ways to inform your opinion of a company. 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 with significant insider holdings 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.