Daldrup & Söhne (ETR:4DS): Uncovering Hidden Profitability in a Conservative Accounting Framework

In the world of industrial services, Daldrup & Söhne AG (ETR:4DS) stands out not only for its operational resilience but also for its adherence to conservative accounting practices-a duality that may be masking its true earnings potential. As the German geothermal energy sector gains momentum amid favorable regulatory shifts, the company's financial disclosures reveal a story of disciplined growth and underappreciated value.

Conservative Accounting: A Double-Edged Sword

Daldrup's financial reporting reflects a strict adherence to the principle of conservatism, which prioritizes prudence in revenue recognition and the early acknowledgment of potential liabilities, as explained in a conservatism primer. For instance, the company's EBIT margin rose to 12.8% in the first half of 2025, up from 10.2% in the same period of 2024, despite a decline in total output to EUR 20.7 million according to its half-year report. This improvement was driven by operational efficiency rather than aggressive revenue booking, as the company deferred recognition of earnings from large projects completed in 2024-a base effect that temporarily depressed 2025 figures, as noted in a Marketscreener note.

Such practices align with the accounting adage "anticipate no profit, but anticipate all losses," which ensures that financial statements avoid overstating assets or income, as discussed in a CFI article. While this approach enhances credibility, it also creates a lag in recognizing earnings, potentially underrepresenting the company's true profitability. For example, Daldrup's record order backlog of EUR 140 million as of August 2025-a 354% increase from EUR 31 million in August 2024-signals robust future cash flows that are not yet fully reflected in current earnings, according to an FT Markets announcement.

Analysts Highlight Undervaluation

Analysts argue that Daldrup's conservative accounting may be contributing to its undervaluation. A 2025 Simply Wall St report estimates the stock's fair value at €26.24, nearly 43% above its current price of €14.85. This discrepancy is partly attributed to the company's delayed revenue recognition, which smooths earnings over time but understates near-term performance. For instance, Daldrup's EBIT of EUR 2.6 million in H1 2025-a 6.8% increase in net profit year-over-year-does not fully capture the value locked in its EUR 140 million order backlog, which is expected to drive growth into 2026, according to Webull coverage.

Comparative metrics further underscore this gap. Daldrup's price-to-earnings (PE) ratio of 39.66 as of October 2025 exceeds that of peers like 2G Energy AG (26.19) and Nabaltec AG (10.12), suggesting the market assigns a lower multiple to its earnings despite stronger fundamentals, based on Wisesheets data. This disconnect may reflect skepticism about the company's ability to sustain its EBIT margin of 10–12% for 2025, a forecast management has reaffirmed in the same half-year report amid rising demand in geothermal energy and environmental services.

Strategic Positioning in a High-Growth Sector

The company's conservative approach is not without justification. Operating in a capital-intensive industry with long project cycles, Daldrup has prioritized financial stability, maintaining an equity ratio of 68.8% and securing two new drilling rigs to expand capacity, according to a Finanzwire report. These investments, coupled with Germany's special infrastructure fund for geothermal energy, position the firm to capitalize on a sector projected to grow at 12% annually through 2030, per a MarketsandMarkets forecast. Yet, the delayed recognition of these opportunities in earnings reports may be blinding investors to Daldrup's long-term potential.

Conclusion: A Case for Reassessment

Daldrup & Söhne's conservative accounting practices, while prudent, may be obscuring its earnings power. With a robust order backlog, strategic investments, and a favorable regulatory tailwind, the company is well-positioned to deliver outsized returns. For investors willing to look beyond short-term earnings and recognize the value of disciplined financial reporting, Daldrup presents a compelling case of hidden profitability. As the geothermal energy sector accelerates, the market may yet reprice this undervalued industrial player.