Many investors consider it preferable to invest in profitable companies over unprofitable ones, because profitability suggests a business is sustainable. However, sometimes companies receive a one-off boost (or reduction) to their profit, and it’s not always clear whether statutory profits are a good guide, going forward. This article will consider whether Lampsa Hellenic Hotels‘s (ATH:LAMPS) statutory profits are a good guide to its underlying earnings.
We like the fact that Lampsa Hellenic Hotels made a profit of €11.2m on its revenue of €69.9m, in the last year. Happily, it has grown both its profit and revenue over the last three years, as you can see in the chart below.
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 Lampsa Hellenic Hotels’s statutory earnings. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Lampsa Hellenic Hotels.
How Do Unusual Items Influence Profit?
While we like to see profit increases, we tend to be a little more cautious when unusual items have made a big contribution. 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. Lampsa Hellenic Hotels had a rather significant contribution from unusual items relative to its profit to June 2019. 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 Lampsa Hellenic Hotels’s Profit Performance
As previously mentioned, Lampsa Hellenic Hotels’s large boost from unusual items won’t be there indefinitely, so its statutory earnings are probably a poor guide to its underlying profitability. For this reason, we think that Lampsa Hellenic Hotels’s statutory profits may be a bad guide to its underlying earnings power, and might give investors an overly positive impression of the company. But the good news is that its EPS growth over the last three years has been very impressive. Of course, we’ve only just scratched the surface when it comes to analysing its earnings; one could also consider margins, forecast growth, and return on investment, among other factors. Just as investors must consider earnings, it is also important to take into account the strength of a company’s balance sheet. If you want to,you can see our take on Lampsa Hellenic Hotels’s balance sheet by clicking here.
This note has only looked at a single factor that sheds light on the nature of Lampsa Hellenic Hotels’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.
If you spot an error that warrants correction, please contact the editor at email@example.com. 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. Simply Wall St has no position in the stocks mentioned.
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