We Wouldn't Rely On Comba Telecom Systems Holdings's (HKG:2342) Statutory Earnings As A Guide

Many investors consider it preferable to invest in profitable companies over unprofitable ones, because profitability suggests a business is sustainable. 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 Comba Telecom Systems Holdings (HKG:2342).

While Comba Telecom Systems Holdings was able to generate revenue of HK$5.27b in the last twelve months, we think its profit result of HK$122.7m was more important.

View our latest analysis for Comba Telecom Systems Holdings

Of course, it is only sensible to look beyond the statutory profits and question how well those numbers represent the sustainable earnings power of the business. Therefore, today we will consider the nature of Comba Telecom Systems Holdings' statutory earnings with reference to its dilution of shareholders and the impact of unusual items. Our data indicates that Comba Telecom Systems Holdings insiders have been buying shares! You can click here to find out who, and how much.

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. As it happens, Comba Telecom Systems Holdings issued 11% more new shares over the last year. As a result, its net income is now split between a greater number of shares. Per share metrics like EPS help us understand how much actual shareholders are benefitting from the company's profits, while the net income level gives us a better view of the company's absolute size. You can see a chart of Comba Telecom Systems Holdings' EPS by clicking here.

How Is Dilution Impacting Comba Telecom Systems Holdings' Earnings Per Share? (EPS)

We don't have any data on the company's profits from three years ago. And even focusing only on the last twelve months, we don't have a meaningful growth rate because it made a loss a year ago, too. But mathematics aside, it is always good to see when a formerly unprofitable business come good (though we accept profit would have been higher if dilution had not been required). So you can see that the dilution has had a bit of an impact on shareholders. Therefore, the dilution is having a noteworthy influence on shareholder returns. And so, you can see quite clearly that dilution is influencing shareholder earnings.

In the long term, if Comba Telecom Systems Holdings' earnings per share can increase, then the share price should too. But on the other hand, we'd be far less excited to learn profit (but not EPS) was improving. For that reason, you could say that EPS is more important that net income in the long run, assuming the goal is to assess whether a company's share price might grow.

The Impact Of Unusual Items On Profit

Finally, we should also consider the fact that unusual items boosted Comba Telecom Systems Holdings' net profit by HK$7.8m over the last year. 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. And, after all, that's exactly what the accounting terminology implies. If Comba Telecom Systems Holdings doesn't see that contribution repeat, then all else being equal we'd expect its profit to drop over the current year.

Our Take On Comba Telecom Systems Holdings' Profit Performance

In its last report Comba Telecom Systems Holdings benefitted from unusual items which boosted its profit, which could make the profit seem better than it really is on a sustainable basis. On top of that, the dilution means that its earnings per share performance is worse than its profit performance. For the reasons mentioned above, we think that a perfunctory glance at Comba Telecom Systems Holdings' statutory profits might make it look better than it really is on an underlying level. If you want to do dive deeper into Comba Telecom Systems Holdings, you'd also look into what risks it is currently facing. You'd be interested to know, that we found 1 warning sign for Comba Telecom Systems Holdings and you'll want to know about it.

Our examination of Comba Telecom Systems Holdings has focussed on certain factors that can make its earnings look better than they are. And, on that basis, we are somewhat skeptical. 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.

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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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