Shareholders In Putprop (JSE:PPR) Should Look Beyond Earnings For The Full Story

Despite posting strong earnings, ( ) stock didn't move much over the last week. We think that investors might be worried about the foundations the earnings are built on. 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 seem better than it really is. It's worth noting that Putprop saw a big increase in non-operating revenue over the last year.



Indeed, its non-operating revenue rose from R139.0k last year to R12.4m 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. we always recommend investors check balance sheet strength.

. As well as that spike in non-operating revenue, we should also consider the R21m boost to profit coming from unusual items, over the last year. While it's always nice to have higher profit, a large contribution from unusual items sometimes dampens our enthusiasm.

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. If Putprop doesn't see that contribution repeat, then all else being equal we'd expect its profit to drop over the current year.

In its last report Putprop 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 Putprop's profits probably give an overly generous impression of its sustainable level of profitability.

Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. For example, Putprop has we think you should know about. Our examination of Putprop 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 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.

While it might take a little research on your behalf, you may find this , or to be useful..