We Think Knafaim Holdings' (TLV:KNFM) Solid Earnings Are Understated

Knafaim Holdings Ltd.'s (TLV:KNFM) recent earnings report didn't offer any surprises, with the shares unchanged over the last week. We did some digging, and we think that investors are missing some encouraging factors in the underlying numbers.

Check out our latest analysis for Knafaim Holdings

How Do Unusual Items Influence Profit?

To properly understand Knafaim Holdings' profit results, we need to consider the US$8.4m expense attributed to unusual items. It's never great to see unusual items costing the company profits, but on the upside, things might improve sooner rather than later. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. And, after all, that's exactly what the accounting terminology implies. Assuming those unusual expenses don't come up again, we'd therefore expect Knafaim Holdings to produce a higher profit next year, all else being equal.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Knafaim Holdings.

An Unusual Tax Situation

Just as we noted the unusual items, we must inform you that Knafaim Holdings received a tax benefit which contributed US$2.0m to the bottom line. This is of course a bit out of the ordinary, given it is more common for companies to be paying tax than receiving tax benefits! We're sure the company was pleased with its tax benefit. And since it previously lost money, it may well simply indicate the realisation of past tax losses. However, the devil in the detail is that these kind of benefits only impact in the year they are booked, and are often one-off in nature. Assuming the tax benefit is not repeated every year, we could see its profitability drop noticeably, all else being equal. While we think it's good that the company has booked a tax benefit, it does mean that there's every chance the statutory profit will come in a lot higher than it would be if the income was adjusted for one-off factors.

Our Take On Knafaim Holdings' Profit Performance

In its last report Knafaim Holdings received a tax benefit which might make its profit look better than it really is on a underlying level. But on the other hand, it also saw an unusual item depress its profit. Considering all the aforementioned, we'd venture that Knafaim Holdings' profit result is a pretty good guide to its true profitability, albeit a bit on the conservative side. So while earnings quality is important, it's equally important to consider the risks facing Knafaim Holdings at this point in time. To that end, you should learn about the 4 warning signs we've spotted with Knafaim Holdings (including 1 which makes us a bit uncomfortable).

In this article we've looked at a number of factors that can impair the utility of profit numbers, as a guide to a business. 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. 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. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.