We Think Naim Holdings Berhad's (KLSE:NAIM) Statutory Profit Might Understate Its Earnings Potential

As a general rule, we think profitable companies are less risky than companies that lose money. However, sometimes companies receive a one-off boost (or reduction) to their profit, and it's not always clear whether statutory profits are a good guide, going forward. Today we'll focus on whether this year's statutory profits are a good guide to understanding Naim Holdings Berhad (KLSE:NAIM).

While Naim Holdings Berhad was able to generate revenue of RM208.4m in the last twelve months, we think its profit result of RM22.8m was more important. Even though revenue is down over the last three years, you can see in the chart below that the company has moved from loss-making to profitable.

See our latest analysis for Naim Holdings Berhad

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 have impacted Naim Holdings Berhad's most recent profit results. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Naim Holdings Berhad.

How Do Unusual Items Influence Profit?

For anyone who wants to understand Naim Holdings Berhad's profit beyond the statutory numbers, it's important to note that during the last twelve months statutory profit was reduced by RM5.2m 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, after all, that's exactly what the accounting terminology implies. In the twelve months to June 2020, Naim Holdings Berhad had a big unusual items expense. As a result, we can surmise that the unusual items made its statutory profit significantly weaker than it would otherwise be.

Our Take On Naim Holdings Berhad's Profit Performance

As we discussed above, we think the significant unusual expense will make Naim Holdings Berhad's statutory profit lower than it would otherwise have been. Based on this observation, we consider it possible that Naim Holdings Berhad's statutory profit actually understates its earnings potential! Unfortunately, though, its earnings per share actually fell back over the last year. At the end of the day, it's essential to consider more than just the factors above, if you want to understand the company properly. 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. Every company has risks, and we've spotted 3 warning signs for Naim Holdings Berhad (of which 1 is a bit concerning!) you should know about.

This note has only looked at a single factor that sheds light on the nature of Naim Holdings Berhad'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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