Should You Use Lotus Horizon Holdings's (HKG:6063) Statutory Earnings To Analyse It?

It might be old fashioned, but we really like to invest in companies that make a profit, each and every year. 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 Lotus Horizon Holdings (HKG:6063).

It's good to see that over the last twelve months Lotus Horizon Holdings made a profit of HK$23.6m on revenue of HK$216.2m. While it managed to grow its revenue over the last three years, its profit has moved in the other direction, as you can see in the chart below.

View our latest analysis for Lotus Horizon Holdings

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 Lotus Horizon Holdings' most recent profit results. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Lotus Horizon Holdings.

The Impact Of Unusual Items On Profit

To properly understand Lotus Horizon Holdings' profit results, we need to consider the HK$11m expense attributed to unusual items. 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, after all, that's exactly what the accounting terminology implies. If Lotus Horizon Holdings doesn't see those unusual expenses repeat, then all else being equal we'd expect its profit to increase over the coming year.

Our Take On Lotus Horizon Holdings' Profit Performance

Because unusual items detracted from Lotus Horizon Holdings' earnings over the last year, you could argue that we can expect an improved result in the current quarter. Because of this, we think Lotus Horizon Holdings' earnings potential is at least as good as it seems, and maybe even better! Unfortunately, though, its earnings per share actually fell back over 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. So while earnings quality is important, it's equally important to consider the risks facing Lotus Horizon Holdings at this point in time. In terms of investment risks, we've identified 4 warning signs with Lotus Horizon Holdings, and understanding them should be part of your investment process.

Today we've zoomed in on a single data point to better understand the nature of Lotus Horizon 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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