Stock Analysis

Here's Why We Think Abu Dhabi National Hotels Company PJSC's (ADX:ADNH) Statutory Earnings Might Be Conservative

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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 Abu Dhabi National Hotels Company PJSC (ADX:ADNH).

We like the fact that Abu Dhabi National Hotels Company PJSC made a profit of د.إ39.2m on its revenue of د.إ1.07b, in the last year. In the last few years both its revenue and its profit have fallen, as you can see in the chart below.

See our latest analysis for Abu Dhabi National Hotels Company PJSC

ADX:ADNH Earnings and Revenue History January 19th 2021

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 discuss how unusual items have impacted Abu Dhabi National Hotels Company PJSC'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 Abu Dhabi National Hotels Company PJSC.

How Do Unusual Items Influence Profit?

Importantly, our data indicates that Abu Dhabi National Hotels Company PJSC's profit was reduced by د.إ35m, due to unusual items, over the last year. 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 that's hardly a surprise given these line items are considered unusual. Abu Dhabi National Hotels Company PJSC took a rather significant hit from unusual items in the year to September 2020. All else being equal, this would likely have the effect of making the statutory profit look worse than its underlying earnings power.

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

As we mentioned previously, the Abu Dhabi National Hotels Company PJSC's profit was hampered by unusual items in the last year. Based on this observation, we consider it possible that Abu Dhabi National Hotels Company PJSC's statutory profit actually understates its earnings potential! On the other hand, its EPS actually shrunk in the last twelve months. 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. So while earnings quality is important, it's equally important to consider the risks facing Abu Dhabi National Hotels Company PJSC at this point in time. When we did our research, we found 4 warning signs for Abu Dhabi National Hotels Company PJSC (1 makes us a bit uncomfortable!) that we believe deserve your full attention.

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 is always more to discover if you are capable of focussing your mind on minutiae. 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.

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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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