Does Mainland Headwear Holdings’s (HKG:1100) Statutory Profit Adequately Reflect Its Underlying Profit?

As a general rule, we think profitable companies are less risky than companies that lose money. 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 Mainland Headwear Holdings (HKG:1100).

We like the fact that Mainland Headwear Holdings made a profit of HK$57.0m on its revenue of HK$1.15b, in the last year. While it managed to grow its revenue over the last three years, its profit has moved in the other direction, as you can see in the chart below.

View our latest analysis for Mainland Headwear Holdings

SEHK:1100 Income Statement June 4th 2020
SEHK:1100 Income Statement June 4th 2020

Importantly, statutory profits are not always the best tool for understanding a company’s true earnings power, so it’s well worth examining profits in a little more detail. This article will focus on the impact unusual items have had on Mainland Headwear Holdings’s statutory earnings. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Mainland Headwear Holdings.

How Do Unusual Items Influence Profit?

For anyone who wants to understand Mainland Headwear Holdings’s profit beyond the statutory numbers, it’s important to note that during the last twelve months statutory profit was reduced by HK$11m due to unusual items. It’s never great to see unusual items costing the company profits, but on the upside, things might improve sooner rather than later. We looked at thousands of listed companies and found that unusual items are very often one-off in nature. And, after all, that’s exactly what the accounting terminology implies. Assuming those unusual expenses don’t come up again, we’d therefore expect Mainland Headwear Holdings to produce a higher profit next year, all else being equal.

Our Take On Mainland Headwear Holdings’s Profit Performance

Because unusual items detracted from Mainland Headwear Holdings’s earnings over the last year, you could argue that we can expect an improved result in the current quarter. Based on this observation, we consider it likely that Mainland Headwear Holdings’s statutory profit actually understates its earnings potential! On the other hand, its EPS actually shrunk in the last twelve months. The goal of this article has been to assess how well we can rely on the statutory earnings to reflect the company’s potential, but there is plenty more to consider. If you want to do dive deeper into Mainland Headwear Holdings, you’d also look into what risks it is currently facing. For example – Mainland Headwear Holdings has 4 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 Mainland Headwear Holdings’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. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.

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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. Thank you for reading.