Why Kato (Hong Kong) Holdings' (HKG:2189) Shaky Earnings Are Just The Beginning Of Its Problems

Last week's earnings announcement from Kato (Hong Kong) Holdings Limited (HKG:2189) was disappointing to investors, with a sluggish profit figure. We did some further digging and think they have a few more reasons to be concerned beyond the statutory profit.

View our latest analysis for Kato (Hong Kong) Holdings

How Do Unusual Items Influence Profit?

Importantly, our data indicates that Kato (Hong Kong) Holdings' profit received a boost of HK$19m in unusual items, over the last year. 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. Assuming those unusual items don't show up again in the current year, we'd thus expect profit to be weaker next year (in the absence of business growth, that is).

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Kato (Hong Kong) Holdings.

Our Take On Kato (Hong Kong) Holdings' Profit Performance

We'd posit that Kato (Hong Kong) Holdings' statutory earnings aren't a clean read on ongoing productivity, due to the large unusual item. Therefore, it seems possible to us that Kato (Hong Kong) Holdings' true underlying earnings power is actually less than its statutory profit. But at least holders can take some solace from the 46% per annum growth in EPS for the last three. 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. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. For example - Kato (Hong Kong) Holdings has 3 warning signs we think you should be aware of.

This note has only looked at a single factor that sheds light on the nature of Kato (Hong Kong) 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. 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. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.