Statistically speaking, it is less risky to invest in profitable companies than in unprofitable ones. That said, the current statutory profit is not always a good guide to a company’s underlying profitability. This article will consider whether Metro Holdings’ (SGX:M01) statutory profits are a good guide to its underlying earnings.
It’s good to see that over the last twelve months Metro Holdings made a profit of S$32.2m on revenue of S$210.3m. As you can see in the chart below, its profit has declined over the last three years, even though its revenue has increased.
Of course, when it comes to statutory profit, the devil is often in the detail, and we can get a better sense for a company by diving deeper into the financial statements. This article will focus on the impact unusual items have had on Metro Holdings’ statutory earnings. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Metro Holdings.
How Do Unusual Items Influence Profit?
Importantly, our data indicates that Metro Holdings’ profit received a boost of S$1.1m in unusual items, over the last year. 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 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. Which is hardly surprising, given the name. Metro Holdings had a rather significant contribution from unusual items relative to its profit to March 2020. 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 Metro Holdings’ Profit Performance
As we discussed above, we think the significant positive unusual item makes Metro Holdings’earnings a poor guide to its underlying profitability. For this reason, we think that Metro Holdings’ statutory profits may be a bad guide to its underlying earnings power, and might give investors an overly positive impression of the company. Sadly, its EPS was down over the last twelve months. At the end of the day, it’s essential to consider more than just the factors above, if you want to understand the company properly. If you’d like to know more about Metro Holdings as a business, it’s important to be aware of any risks it’s facing. For example, we’ve found that Metro Holdings has 3 warning signs (1 doesn’t sit too well with us!) that deserve your attention before going any further with your analysis.
This note has only looked at a single factor that sheds light on the nature of Metro Holdings’ 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. 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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