It might be old fashioned, but we really like to invest in companies that make a profit, each and every year. Having said that, sometimes statutory profit levels are not a good guide to ongoing profitability, because some short term one-off factor has impacted profit levels. Today we’ll focus on whether this year’s statutory profits are a good guide to understanding Honmyue Enterprise (TPE:1474).
We like the fact that Honmyue Enterprise made a profit of NT$110.6m on its revenue of NT$2.90b, in the last year. The chart below shows how profit is flat over the last three years, even though revenue has declined.
Of course, it is only sensible to look beyond the statutory profits and question how well those numbers represent the sustainable earnings power of the business. This article will focus on the impact unusual items have had on Honmyue Enterprise’s statutory earnings. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Honmyue Enterprise.
How Do Unusual Items Influence Profit?
For anyone who wants to understand Honmyue Enterprise’s profit beyond the statutory numbers, it’s important to note that during the last twelve months statutory profit gained from NT$65m worth of unusual items. While we like to see profit increases, we tend to be a little more cautious when unusual items have made a big contribution. We ran the numbers on most publicly listed companies worldwide, and it’s very common for unusual items to be once-off in nature. And that’s as you’d expect, given these boosts are described as ‘unusual’. Honmyue Enterprise had a rather significant contribution from unusual items relative to its profit to September 2020. 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 Honmyue Enterprise’s Profit Performance
As we discussed above, we think the significant positive unusual item makes Honmyue Enterprise’searnings a poor guide to its underlying profitability. For this reason, we think that Honmyue Enterprise’s statutory profits may be a bad guide to its underlying earnings power, and might give investors an overly positive impression of the company. The silver lining is that its EPS growth over the last year has been really wonderful, even if it’s not a perfect measure. 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. With this in mind, we wouldn’t consider investing in a stock unless we had a thorough understanding of the risks. For example, we’ve found that Honmyue Enterprise has 4 warning signs (2 are a bit unpleasant!) that deserve your attention before going any further with your analysis.
Today we’ve zoomed in on a single data point to better understand the nature of Honmyue Enterprise’s profit. But there are plenty of other ways to inform your opinion of a company. Some people consider a high return on equity to be a good sign of a quality business. 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. 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.
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