Are Dong-A Hwa SungLtd's (KOSDAQ:041930) Statutory Earnings A Good Reflection Of Its Earnings Potential?

As a general rule, we think profitable companies are less risky than companies that lose money. 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 Dong-A Hwa SungLtd's (KOSDAQ:041930) statutory profits are a good guide to its underlying earnings.

We like the fact that Dong-A Hwa SungLtd made a profit of ₩3.98b on its revenue of ₩262.1b, in the last year. The chart below shows that revenue has been flat over the last three years, while profit has actually declined.

Check out our latest analysis for Dong-A Hwa SungLtd

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 Dong-A Hwa SungLtd's statutory earnings. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Dong-A Hwa SungLtd.

The Impact Of Unusual Items On Profit

To properly understand Dong-A Hwa SungLtd's profit results, we need to consider the ₩1.1b 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 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. If Dong-A Hwa SungLtd 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 Dong-A Hwa SungLtd's Profit Performance

We'd posit that Dong-A Hwa SungLtd's statutory earnings aren't a clean read on ongoing productivity, due to the large unusual item. Because of this, we think that it may be that Dong-A Hwa SungLtd's statutory profits are better than its underlying earnings power. Sadly, its EPS was down over the last twelve months. Of course, we've only just scratched the surface when it comes to analysing its earnings; one could also consider margins, forecast growth, and return on investment, among other factors. So while earnings quality is important, it's equally important to consider the risks facing Dong-A Hwa SungLtd at this point in time. To help with this, we've discovered 4 warning signs (1 shouldn't be ignored!) that you ought to be aware of before buying any shares in Dong-A Hwa SungLtd.

Today we've zoomed in on a single data point to better understand the nature of Dong-A Hwa SungLtd's 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. 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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