Stock Analysis

Should You Use Korea District Heating's (KRX:071320) Statutory Earnings To Analyse It?

KOSE:A071320
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It might be old fashioned, but we really like to invest in companies that make a profit, each and every year. 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 Korea District Heating (KRX:071320).

While Korea District Heating was able to generate revenue of ₩2.17t in the last twelve months, we think its profit result of ₩16.1b was more important.

See our latest analysis for Korea District Heating

earnings-and-revenue-history
KOSE:A071320 Earnings and Revenue History November 27th 2020

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 Korea District Heating's statutory earnings. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Korea District Heating.

The Impact Of Unusual Items On Profit

For anyone who wants to understand Korea District Heating's profit beyond the statutory numbers, it's important to note that during the last twelve months statutory profit was reduced by ₩15b due to unusual items. While deductions due to unusual items are disappointing in the first instance, there is a silver lining. We looked at thousands of listed companies and found that unusual items are very often one-off in nature. And that's hardly a surprise given these line items are considered unusual. If Korea District Heating doesn't see those unusual expenses repeat, then all else being equal we'd expect its profit to increase over the coming year.

Our Take On Korea District Heating's Profit Performance

Unusual items (expenses) detracted from Korea District Heating's earnings over the last year, but we might see an improvement next year. Based on this observation, we consider it likely that Korea District Heating's statutory profit actually understates its earnings potential! And one can definitely find a positive in the fact that it made a profit this year, despite losing money 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 Korea District Heating at this point in time. To that end, you should learn about the 2 warning signs we've spotted with Korea District Heating (including 1 which makes us a bit uncomfortable).

This note has only looked at a single factor that sheds light on the nature of Korea District Heating'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. 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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