Here's Why We Don't Think Kangnam Jevisco's (KRX:000860) Statutory Earnings Reflect Its Underlying Earnings Potential

Statistically speaking, it is less risky to invest in profitable companies than in unprofitable ones. 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 Kangnam Jevisco (KRX:000860).

While Kangnam Jevisco was able to generate revenue of ₩330.5b in the last twelve months, we think its profit result of ₩16.0b was more important. As you can see in the chart below, its profit has declined over the last three years, even though its revenue has increased.

Check out our latest analysis for Kangnam Jevisco

Of course, when it comes to statutory profit, the devil is often in the detail, and we can get a better sense for a company by diving deeper into the financial statements. This article will focus on the impact unusual items have had on Kangnam Jevisco's statutory earnings. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Kangnam Jevisco.

The Impact Of Unusual Items On Profit

For anyone who wants to understand Kangnam Jevisco's profit beyond the statutory numbers, it's important to note that during the last twelve months statutory profit gained from ₩3.1b worth of 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 that's as you'd expect, given these boosts are described as 'unusual'. We can see that Kangnam Jevisco's positive unusual items were quite significant relative to its profit in the year to September 2020. All else being equal, this would likely have the effect of making the statutory profit a poor guide to underlying earnings power.

Our Take On Kangnam Jevisco's Profit Performance

As we discussed above, we think the significant positive unusual item makes Kangnam Jevisco'searnings a poor guide to its underlying profitability. As a result, we think it may well be the case that Kangnam Jevisco's underlying earnings power is lower than its statutory profit. But at least holders can take some solace from the 29% EPS growth in the last year. The goal of this article has been to assess how well we can rely on the statutory earnings to reflect the company's potential, but there is plenty more to consider. So while earnings quality is important, it's equally important to consider the risks facing Kangnam Jevisco at this point in time. Our analysis shows 2 warning signs for Kangnam Jevisco (1 can't be ignored!) and we strongly recommend you look at these before investing.

This note has only looked at a single factor that sheds light on the nature of Kangnam Jevisco's profit. But there is always more to discover if you are capable of focussing your mind on minutiae. 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. 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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