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. This article will consider whether Keyang Electric Machinery's (KRX:012200) statutory profits are a good guide to its underlying earnings.
We like the fact that Keyang Electric Machinery made a profit of ₩8.35b on its revenue of ₩369.5b, in the last year. While it managed to grow its revenue over the last three years, its profit has moved in the other direction, as you can see in the chart below.
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. As a reuslt, we think it's important to consider how unusual items and the recent tax benefit have influenced Keyang Electric Machinery's statutory profit. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Keyang Electric Machinery.
How Do Unusual Items Influence Profit?
To properly understand Keyang Electric Machinery's profit results, we need to consider the ₩2.3b 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 that's hardly a surprise given these line items are considered unusual. In the twelve months to September 2020, Keyang Electric Machinery had a big unusual items expense. All else being equal, this would likely have the effect of making the statutory profit look worse than its underlying earnings power.
An Unusual Tax Situation
Just as we noted the unusual items, we must inform you that Keyang Electric Machinery received a tax benefit which contributed ₩963m to the bottom line. It's always a bit noteworthy when a company is paid by the tax man, rather than paying the tax man. The receipt of a tax benefit is obviously a good thing, on its own. 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. In the likely event the tax benefit is not repeated, we'd expect to see its statutory profit levels drop, at least in the absence of strong growth. 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 Keyang Electric Machinery's Profit Performance
In the last year Keyang Electric Machinery 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. Having said that, it also had a unusual item reducing its profit. Given the contrasting considerations, we don't have a strong view as to whether Keyang Electric Machinery's profits are an apt reflection of its underlying potential for profit. If you'd like to know more about Keyang Electric Machinery as a business, it's important to be aware of any risks it's facing. For example, we've found that Keyang Electric Machinery has 3 warning signs (1 makes us a bit uncomfortable!) that deserve your attention before going any further with your analysis.
Our examination of Keyang Electric Machinery has focussed on certain factors that can make its earnings look better than they are. 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. 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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