We're Not Counting On Hanan Mor Group - Holdings (TLV:HNMR) 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. However, sometimes companies receive a one-off boost (or reduction) to their profit, and it's not always clear whether statutory profits are a good guide, going forward. In this article, we'll look at how useful this year's statutory profit is, when analysing Hanan Mor Group - Holdings (TLV:HNMR).

While Hanan Mor Group - Holdings was able to generate revenue of ₪149.8m in the last twelve months, we think its profit result of ₪4.86m was more important. The chart below shows that both revenue and profit have declined over the last three years.

See our latest analysis for Hanan Mor Group - Holdings

Not all profits are equal, and we can learn more about the nature of a company's past profitability by diving deeper into the financial statements. Therefore, today we will consider the nature of Hanan Mor Group - Holdings' statutory earnings with reference to its dilution of shareholders and the impact of unusual items. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Hanan Mor Group - Holdings.

In order to understand the potential for per share returns, it is essential to consider how much a company is diluting shareholders. As it happens, Hanan Mor Group - Holdings issued 6.2% more new shares over the last year. Therefore, each share now receives a smaller portion of profit. To talk about net income, without noticing earnings per share, is to be distracted by the big numbers while ignoring the smaller numbers that talk to per share value. You can see a chart of Hanan Mor Group - Holdings' EPS by clicking here.

A Look At The Impact Of Hanan Mor Group - Holdings' Dilution on Its Earnings Per Share (EPS).

Hanan Mor Group - Holdings' net profit dropped by 82% per year over the last three years. Even looking at the last year, profit was still down 78%. Sadly, earnings per share fell further, down a full 80% in that time. 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.

If Hanan Mor Group - Holdings' EPS can grow over time then that drastically improves the chances of the share price moving in the same direction. 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.

How Do Unusual Items Influence Profit?

Alongside that dilution, it's also important to note that Hanan Mor Group - Holdings' profit was boosted by unusual items worth ₪23m in the last twelve months. We can't deny that higher profits generally leave us optimistic, but we'd prefer it if the profit were to be sustainable. 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'. Hanan Mor Group - Holdings had a rather significant contribution from unusual items relative to its profit to September 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 Hanan Mor Group - Holdings' Profit Performance

To sum it all up, Hanan Mor Group - Holdings got a nice boost to profit from unusual items; without that, its statutory results would have looked worse. And furthermore, it went and issued plenty of new shares, ensuring that each shareholder (who did not tip more money in) now owns a smaller proportion of the company. Considering all this we'd argue Hanan Mor Group - Holdings' profits probably give an overly generous impression of its sustainable level of profitability. If you'd like to know more about Hanan Mor Group - Holdings as a business, it's important to be aware of any risks it's facing. For instance, we've identified 5 warning signs for Hanan Mor Group - Holdings (1 shouldn't be ignored) you should be familiar with.

Our examination of Hanan Mor Group - 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 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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