It might be old fashioned, but we really like to invest in companies that make a profit, each and every year. 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 Melbourne Enterprises (HKG:158).
While Melbourne Enterprises was able to generate revenue of HK$224.3m in the last twelve months, we think its profit result of HK$1.39b was more important. The chart below shows how profit has actually increased over the last three years, even while revenue has declined.
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 focus on the impact unusual items have had on Melbourne Enterprises’s statutory earnings. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Melbourne Enterprises.
How Do Unusual Items Influence Profit?
To properly understand Melbourne Enterprises’s profit results, we need to consider the HK$1.2b gain attributed to unusual items. While it’s always nice to have higher profit, a large contribution from unusual items sometimes dampens our enthusiasm. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. And that’s as you’d expect, given these boosts are described as ‘unusual’. Melbourne Enterprises had a rather significant contribution from unusual items relative to its profit to March 2019. 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 Melbourne Enterprises’s Profit Performance
As we discussed above, we think the significant positive unusual item makes Melbourne Enterprises’s earnings a poor guide to its underlying profitability. As a result, we think it may well be the case that Melbourne Enterprises’s underlying earnings power is lower than its statutory profit. But on the bright side, its earnings per share have grown at an extremely impressive rate over the last three years. 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. Just as investors must consider earnings, it is also important to take into account the strength of a company’s balance sheet. If you’re interestedwe have a graphic representation of Melbourne Enterprises’s balance sheet.
This note has only looked at a single factor that sheds light on the nature of Melbourne Enterprises’s profit. But there are plenty of other ways to inform your opinion of a company. 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.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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. Simply Wall St has no position in the stocks mentioned.
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