Broadly speaking, profitable businesses are less risky than unprofitable ones. 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. In this article, we’ll look at how useful this year’s statutory profit is, when analysing G.A. Holdings (HKG:8126).
It’s good to see that over the last twelve months G.A. Holdings made a profit of HK$32.1m on revenue of HK$2.13b. The chart below shows how it has grown revenue over the last three years, but that profit has declined.
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 G.A. Holdings’ statutory earnings. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of G.A. Holdings.
How Do Unusual Items Influence Profit?
For anyone who wants to understand G.A. Holdings’ profit beyond the statutory numbers, it’s important to note that during the last twelve months statutory profit gained from HK$17m worth of unusual items. While it’s always nice to have higher profit, a large contribution from unusual items sometimes dampens our enthusiasm. When we crunched the numbers on thousands of publicly listed companies, we found that a boost from unusual items in a given year is often not repeated the next year. And, after all, that’s exactly what the accounting terminology implies. Assuming those unusual items don’t show up again in the current year, we’d thus expect profit to be weaker next year (in the absence of business growth, that is).
Our Take On G.A. Holdings’ Profit Performance
We’d posit that G.A. Holdings’ statutory earnings aren’t a clean read on ongoing productivity, due to the large unusual item. Because of this, we think that it may be that G.A. Holdings’ statutory profits are better than its underlying earnings power. The good news is that its earnings per share increased slightly in the last year. 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. Keep in mind, when it comes to analysing a stock it’s worth noting the risks involved. For instance, we’ve identified 5 warning signs for G.A. Holdings (2 are significant) you should be familiar with.
Today we’ve zoomed in on a single data point to better understand the nature of G.A. Holdings’ 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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