We're Not Counting On SMIT Holdings (HKG:2239) To Sustain Its Statutory Profitability

Many investors consider it preferable to invest in profitable companies over unprofitable ones, because profitability suggests a business is sustainable. 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. This article will consider whether SMIT Holdings' (HKG:2239) statutory profits are a good guide to its underlying earnings.

It's good to see that over the last twelve months SMIT Holdings made a profit of US$6.83m on revenue of US$38.7m.

Check out our latest analysis for SMIT Holdings

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 SMIT Holdings' statutory earnings. Our data indicates that SMIT Holdings insiders have been buying shares! Luckily we are in a position to provide you with this free chart of of all insider buying (and selling).

The Impact Of Unusual Items On Profit

To properly understand SMIT Holdings' profit results, we need to consider the US$19m gain attributed to unusual items. While we like to see profit increases, we tend to be a little more cautious when unusual items have made a big contribution. When we crunched the numbers on thousands of publicly listed companies, we found that a boost from unusual items in a given year is often not repeated the next year. Which is hardly surprising, given the name. SMIT Holdings had a rather significant contribution from unusual items relative to its profit to June 2020. As a result, we can surmise that the unusual items are making its statutory profit significantly stronger than it would otherwise be.

Our Take On SMIT Holdings' Profit Performance

As we discussed above, we think the significant positive unusual item makes SMIT Holdings'earnings a poor guide to its underlying profitability. For this reason, we think that SMIT Holdings' statutory profits may be a bad guide to its underlying earnings power, and might give investors an overly positive impression of the company. On the bright side, the company showed enough improvement to book a profit this year, after losing money 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 SMIT Holdings as a business, it's important to be aware of any risks it's facing. For example - SMIT 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 SMIT Holdings' profit. But there are plenty of other ways to inform your opinion of a company. 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. 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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