Are Kowloon Development's (HKG:34) Statutory Earnings A Good Reflection Of Its Earnings Potential?

December 13, 2020
  •  Updated
September 30, 2022
SEHK:34
Source: Shutterstock

As a general rule, we think profitable companies are less risky than companies that lose money. That said, the current statutory profit is not always a good guide to a company's underlying profitability. In this article, we'll look at how useful this year's statutory profit is, when analysing Kowloon Development (HKG:34).

We like the fact that Kowloon Development made a profit of HK$1.17b on its revenue of HK$9.69b, in the last year. Happily, it has grown both its profit and revenue over the last three years (though we note its profit is down over the last year).

See our latest analysis for Kowloon Development

earnings-and-revenue-history
SEHK:34 Earnings and Revenue History December 14th 2020

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 Kowloon Development'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 Kowloon Development.

How Do Unusual Items Influence Profit?

For anyone who wants to understand Kowloon Development's profit beyond the statutory numbers, it's important to note that during the last twelve months statutory profit was reduced by HK$1.2b due 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. Assuming those unusual expenses don't come up again, we'd therefore expect Kowloon Development to produce a higher profit next year, all else being equal.

Our Take On Kowloon Development's Profit Performance

Because unusual items detracted from Kowloon Development's earnings over the last year, you could argue that we can expect an improved result in the current quarter. Based on this observation, we consider it likely that Kowloon Development's statutory profit actually understates its earnings potential! And on top of that, its earnings per share have grown at 7.6% per year 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. So while earnings quality is important, it's equally important to consider the risks facing Kowloon Development at this point in time. At Simply Wall St, we found 4 warning signs for Kowloon Development and we think they deserve your attention.

This note has only looked at a single factor that sheds light on the nature of Kowloon Development'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. 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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