We Wouldn't Rely On Daewon Kang Up's (KRX:000430) Statutory Earnings As A Guide

As a general rule, we think profitable companies are less risky than companies that lose money. 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 Daewon Kang Up (KRX:000430).

We like the fact that Daewon Kang Up made a profit of ₩2.78b on its revenue of ₩828.7b, in the last year. Below, you can see that both its revenue and its profit have fallen over the last three years.

View our latest analysis for Daewon Kang Up

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. This article, will discuss how unusual items and a tax benefit have impacted Daewon Kang Up's most recent bottom line results. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Daewon Kang Up.

The Impact Of Unusual Items On Profit

Importantly, our data indicates that Daewon Kang Up's profit received a boost of ₩1.4b in unusual items, 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 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'. Assuming those unusual items don't show up again in the current year, we'd thus expect profit to be weaker next year (in the absence of business growth, that is).

An Unusual Tax Situation

Just as we noted the unusual items, we must inform you that Daewon Kang Up received a tax benefit which contributed ₩1.2b to the bottom line. This is meaningful because companies usually pay tax rather than receive tax benefits. Of course, prima facie it's great to receive a tax benefit. 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.

Our Take On Daewon Kang Up's Profit Performance

In the last year Daewon Kang Up received a tax benefit, which boosted its profit in a way that might not be much more sustainable than turning prime farmland into gas fields. Furthermore, it also benefitted from a positive unusual item, which boosted the profit result even higher. Considering all this we'd argue Daewon Kang Up's profits probably give an overly generous impression of its sustainable level of profitability. In light of this, if you'd like to do more analysis on the company, it's vital to be informed of the risks involved. Be aware that Daewon Kang Up is showing 6 warning signs in our investment analysis and 2 of those are a bit unpleasant...

Our examination of Daewon Kang Up 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. 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. 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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