Net profits (PAT) can be misleading!

Every inexperienced investor will just look at the main financial ratios & even the profit after tax (PAT) which is other wise called the net profit & then call it an analysis & invests in that particular stock. But this can be misleading (though not necessarily). The catch is that there can be many companies which brew the profits or profit margins from non core operations though their operational profits are suffering. This is a big red flag!

We need to analyse a company for its actual & steady profitability which will be for their core operations. Higher PAT, say for a year, with that company making losses at its operational levels is not desirable. Operational profits are generated from the main operations of the company by selling it's products or rendering services, which reflects the core business strength of that company depicting it's growth potential. The non operational income which other wise is named as "other income" (in the profit & loss statement) on  the other hand includes revenue from rent, interest, dividends, foreign exchange gains etc.. For some companies the non operational income is temporary. A gradual shrinkage in the operational income indicates the products of the company are no longer having it a shine or competitive advantages, so keep a watch on this while picking a so called profitable company/ stock!