Should You Use Abu Dhabi National Hotels Company PJSC's (ADX:ADNH) Statutory Earnings To Analyse It?

Broadly speaking, profitable businesses are less risky than unprofitable ones. That said, the current statutory profit is not always a good guide to a company's underlying profitability. In this article, we'll look at how useful this year's statutory profit is, when analysing Abu Dhabi National Hotels Company PJSC (ADX:ADNH).

While Abu Dhabi National Hotels Company PJSC was able to generate revenue of د.إ1.38b in the last twelve months, we think its profit result of د.إ132.6m was more important. As you can see in the chart below, its profit has declined over the last three years, even though its revenue has increased.

Check out our latest analysis for Abu Dhabi National Hotels Company PJSC

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 Abu Dhabi National Hotels Company PJSC's statutory earnings. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Abu Dhabi National Hotels Company PJSC.

How Do Unusual Items Influence Profit?

To properly understand Abu Dhabi National Hotels Company PJSC's profit results, we need to consider the د.إ34m expense attributed to unusual items. While deductions due to unusual items are disappointing in the first instance, there is a silver lining. 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. If Abu Dhabi National Hotels Company PJSC doesn't see those unusual expenses repeat, then all else being equal we'd expect its profit to increase over the coming year.

Our Take On Abu Dhabi National Hotels Company PJSC's Profit Performance

Because unusual items detracted from Abu Dhabi National Hotels Company PJSC'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 Abu Dhabi National Hotels Company PJSC's statutory profit actually understates its earnings potential! Unfortunately, though, its earnings per share actually fell back over the last year. 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. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. Case in point: We've spotted 3 warning signs for Abu Dhabi National Hotels Company PJSC you should be aware of.

This note has only looked at a single factor that sheds light on the nature of Abu Dhabi National Hotels Company PJSC's profit. But there are plenty of other ways to inform your opinion of a company. 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.
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