Societatea Energetica Electrica's (BVB:EL) Solid Profits Have Weak Fundamentals

Societatea Energetica Electrica S.A. (BVB:EL) announced strong profits, but the stock was stagnant. We did some digging, and we found some concerning factors in the details.

See our latest analysis for Societatea Energetica Electrica

Operating Revenue Or Not?

Most companies divide classify their revenue as either 'operating revenue', which comes from normal operations, and other revenue, which could include government grants, for example. 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. It's worth noting that Societatea Energetica Electrica saw a big increase in non-operating revenue over the last year. In fact, our data indicates that non-operating revenue increased from RON2.70b to RON3.34b. 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. 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.

Our Take On Societatea Energetica Electrica's Profit Performance

When considering the nature of Societatea Energetica Electrica's earnings, we'd absolutely keep in mind that it saw an increase in non-operating revenue in the last year, which would in turn have boosted its profit, potentially in an unsustainable manner. Because of this, we think that it may be that Societatea Energetica Electrica's statutory profits are better than its underlying earnings power. On the bright side, the company showed enough improvement to book a profit this year, after losing money last year. 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 Societatea Energetica Electrica at this point in time. For example - Societatea Energetica Electrica has 2 warning signs we think you should be aware of.

This note has only looked at a single factor that sheds light on the nature of Societatea Energetica Electrica's profit. But there is always more to discover if you are capable of focussing your mind on minutiae. 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. 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 that insiders are buying 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.