Turism Hoteluri Restaurante Marea Neagra (BVB:EFO) Shareholders Should Be Cautious Despite Solid Earnings

Shareholders were pleased with the recent earnings report from Turism, Hoteluri, Restaurante Marea Neagra S.A. (BVB:EFO). However, we think that investors should be cautious when interpreting the profit numbers.

Check out our latest analysis for Turism Hoteluri Restaurante Marea Neagra

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. 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 Turism Hoteluri Restaurante Marea Neagra saw a big increase in non-operating revenue over the last year. In fact, our data indicates that non-operating revenue increased from RON9.83m to RON11.5m. 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 Turism Hoteluri Restaurante Marea Neagra.

How Do Unusual Items Influence Profit?

As well as that spike in non-operating revenue, we should also consider the RON8.7m boost to profit coming from unusual items, over the last year. 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 crunched the numbers on thousands of publicly listed companies, we found that a boost from unusual items in a given year is often not repeated the next year. Which is hardly surprising, given the name. We can see that Turism Hoteluri Restaurante Marea Neagra's positive unusual items were quite significant relative to its profit in the year to June 2024. All else being equal, this would likely have the effect of making the statutory profit a poor guide to underlying earnings power.

Our Take On Turism Hoteluri Restaurante Marea Neagra's Profit Performance

In the last year Turism Hoteluri Restaurante Marea Neagra's non-operating revenue really gave it a boost, but not in a way that is necessarily going to be sustained. And on top of that, it also saw an unusual item boost its profit, suggesting that next year might see a lower profit number, if these events are not repeated and everything else is equal. Considering all this we'd argue Turism Hoteluri Restaurante Marea Neagra's profits probably give an overly generous impression of its sustainable level of profitability. So while earnings quality is important, it's equally important to consider the risks facing Turism Hoteluri Restaurante Marea Neagra at this point in time. For example, we've found that Turism Hoteluri Restaurante Marea Neagra has 4 warning signs (1 is significant!) that deserve your attention before going any further with your analysis.

Our examination of Turism Hoteluri Restaurante Marea Neagra has focussed on certain factors that can make its earnings look better than they are. And, on that basis, we are somewhat skeptical. But there is always more to discover if you are capable of focussing your mind on minutiae. Some people consider a high return on equity to be a good sign of a quality business. 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.