We’re Not So Sure You Should Rely on Top Global’s (SGX:BHO) Statutory Earnings

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. Today we’ll focus on whether this year’s statutory profits are a good guide to understanding Top Global (SGX:BHO).

It’s good to see that over the last twelve months Top Global made a profit of S$5.92m on revenue of S$59.1m. Even though revenue is down over the last three years, you can see in the chart below that the company has moved from loss-making to profitable.

See our latest analysis for Top Global

SGX:BHO Income Statement, January 9th 2020
SGX:BHO Income Statement, January 9th 2020

Not all profits are equal, and we can learn more about the nature of a company’s past profitability by diving deeper into the financial statements. This article will discuss how unusual items have impacted Top Global’s most recent profit results. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Top Global.

How Do Unusual Items Influence Profit?

For anyone who wants to understand Top Global’s profit beyond the statutory numbers, it’s important to note that during the last twelve months statutory profit gained from S$17m worth of unusual items. We can’t deny that higher profits generally leave us optmistic, 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 suprising, given the name. We can see that Top Global’s positive unusual items were quite significant relative to its profit in the year to September 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 Top Global’s Profit Performance

As previously mentioned, Top Global’s large boost from unusual items won’t be there indefinitely, so its statutory earnings are probably a poor guide to its underlying profitability. As a result, we think it may well be the case that Top Global’s underlying earnings power is lower than its statutory profit. On the bright side, the company showed enough improvement to book a profit this year, after losing money last year. 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. Just as investors must consider earnings, it is also important to take into account the strength of a company’s balance sheet. If you’re interestedwe have a graphic representation of Top Global’s balance sheet.

This note has only looked at a single factor that sheds light on the nature of Top Global’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. 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 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.

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