We Think Wah Wo Holdings Group's (HKG:9938) Statutory Profit Might Understate Its Earnings Potential

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. This article will consider whether Wah Wo Holdings Group's (HKG:9938) statutory profits are a good guide to its underlying earnings.

We like the fact that Wah Wo Holdings Group made a profit of HK$15.4m on its revenue of HK$266.9m, in the last year. As you can see in the chart below, its profit has declined over the last three years, even though its revenue has increased.

See our latest analysis for Wah Wo Holdings Group

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 Wah Wo Holdings Group'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 Wah Wo Holdings Group.

How Do Unusual Items Influence Profit?

For anyone who wants to understand Wah Wo Holdings Group's profit beyond the statutory numbers, it's important to note that during the last twelve months statutory profit was reduced by HK$22m due to unusual items. While deductions due to unusual items are disappointing in the first instance, there is a silver lining. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. And that's hardly a surprise given these line items are considered unusual. Wah Wo Holdings Group took a rather significant hit from unusual items in the year to September 2020. As a result, we can surmise that the unusual items made its statutory profit significantly weaker than it would otherwise be.

Our Take On Wah Wo Holdings Group's Profit Performance

As we mentioned previously, the Wah Wo Holdings Group's profit was hampered by unusual items in the last year. Because of this, we think Wah Wo Holdings Group's underlying earnings potential is as good as, or possibly even better, than the statutory profit makes it seem! On the other hand, its EPS actually shrunk in the last twelve months. 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. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. Case in point: We've spotted 4 warning signs for Wah Wo Holdings Group you should be mindful of and 1 of these is a bit concerning.

This note has only looked at a single factor that sheds light on the nature of Wah Wo Holdings Group'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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