We're Not So Sure You Should Rely on Kin Yat Holdings's (HKG:638) Statutory Earnings

Statistically speaking, it is less risky to invest in profitable companies than in unprofitable ones. Having said that, sometimes statutory profit levels are not a good guide to ongoing profitability, because some short term one-off factor has impacted profit levels. In this article, we'll look at how useful this year's statutory profit is, when analysing Kin Yat Holdings (HKG:638).

While Kin Yat Holdings was able to generate revenue of HK$2.59b in the last twelve months, we think its profit result of HK$187.3m was more important. Below, you can see that both its revenue and its profit have fallen over the last three years.

View our latest analysis for Kin Yat Holdings

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 focus on the impact unusual items have had on Kin Yat Holdings' statutory earnings. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Kin Yat Holdings.

How Do Unusual Items Influence Profit?

To properly understand Kin Yat Holdings' profit results, we need to consider the HK$36m gain attributed to unusual items. While it's always nice to have higher profit, a large contribution from unusual items sometimes dampens our enthusiasm. We ran the numbers on most publicly listed companies worldwide, and it's very common for unusual items to be once-off in nature. And, after all, that's exactly what the accounting terminology implies. We can see that Kin Yat Holdings' positive unusual items were quite significant relative to its profit in the year to September 2020. 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 Kin Yat Holdings' Profit Performance

As we discussed above, we think the significant positive unusual item makes Kin Yat Holdings'earnings a poor guide to its underlying profitability. As a result, we think it may well be the case that Kin Yat Holdings' underlying earnings power is lower than its statutory profit. But at least holders can take some solace from the 29% EPS growth in the 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. If you'd like to know more about Kin Yat Holdings as a business, it's important to be aware of any risks it's facing. For instance, we've identified 3 warning signs for Kin Yat Holdings (1 is potentially serious) you should be familiar with.

Today we've zoomed in on a single data point to better understand the nature of Kin Yat Holdings' 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. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.

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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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