We’re Not Counting On Lippo (HKG:226) To Sustain Its Statutory Profitability

Many investors consider it preferable to invest in profitable companies over unprofitable ones, because profitability suggests a business is sustainable. That said, the current statutory profit is not always a good guide to a company’s underlying profitability. Today we’ll focus on whether this year’s statutory profits are a good guide to understanding Lippo (HKG:226).

We like the fact that Lippo made a profit of HK$137.9m on its revenue of HK$1.78b, in the last year.

View our latest analysis for Lippo

SEHK:226 Income Statement May 18th 2020
SEHK:226 Income Statement May 18th 2020

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 Lippo’s statutory earnings. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Lippo.

The Impact Of Unusual Items On Profit

To properly understand Lippo’s profit results, we need to consider the HK$967m gain attributed to unusual items. We can’t deny that higher profits generally leave us optimistic, but we’d prefer it if the profit were to be sustainable. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. And that’s as you’d expect, given these boosts are described as ‘unusual’. We can see that Lippo’s positive unusual items were quite significant relative to its profit in the year to September 2019. As a result, we can surmise that the unusual items are making its statutory profit significantly stronger than it would otherwise be.

Our Take On Lippo’s Profit Performance

As we discussed above, we think the significant positive unusual item makes Lippo’s earnings a poor guide to its underlying profitability. As a result, we think it may well be the case that Lippo’s underlying earnings power is lower than its statutory profit. The good news is that it earned a profit in the last twelve months, despite its previous loss. 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’d like to know more about Lippo as a business, it’s important to be aware of any risks it’s facing. At Simply Wall St, we found 2 warning signs for Lippo and we think they deserve your attention.

Today we’ve zoomed in on a single data point to better understand the nature of Lippo’s profit. But there is always more to discover if you are capable of focussing your mind on minutiae. Some people consider a high return on equity to be a good sign of a quality business. 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.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.