Should You Use Kwoon Chung Bus Holdings's (HKG:306) Statutory Earnings To Analyse It?

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. Today we'll focus on whether this year's statutory profits are a good guide to understanding Kwoon Chung Bus Holdings (HKG:306).

We like the fact that Kwoon Chung Bus Holdings made a profit of HK$20.2m on its revenue of HK$2.46b, in the last year. As you can see below, its profit has actually declined over the last three years, even though its revenue was flat.

View our latest analysis for Kwoon Chung Bus 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 Kwoon Chung Bus Holdings' statutory earnings. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Kwoon Chung Bus Holdings.

How Do Unusual Items Influence Profit?

For anyone who wants to understand Kwoon Chung Bus Holdings' profit beyond the statutory numbers, it's important to note that during the last twelve months statutory profit was reduced by HK$7.4m due to unusual items. While deductions due to unusual items are disappointing in the first instance, there is a silver lining. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. And that's hardly a surprise given these line items are considered unusual. If Kwoon Chung Bus Holdings doesn't see those unusual expenses repeat, then all else being equal we'd expect its profit to increase over the coming year.

Our Take On Kwoon Chung Bus Holdings' Profit Performance

Because unusual items detracted from Kwoon Chung Bus Holdings' 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 Kwoon Chung Bus Holdings' statutory profit actually understates its earnings potential! On the other hand, its EPS actually shrunk in the last twelve months. 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 if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. Case in point: We've spotted 3 warning signs for Kwoon Chung Bus Holdings you should be mindful of and 2 of them are significant.

This note has only looked at a single factor that sheds light on the nature of Kwoon Chung Bus 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. 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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