Following the solid earnings report from PWF Corporation Bhd. (KLSE:PWF), the market responded by bidding up the stock price. Despite this, our analysis suggests that there are some factors weakening the foundations of those good profit numbers.
The Impact Of Unusual Items On Profit
Importantly, our data indicates that PWF Corporation Bhd's profit received a boost of RM6.2m 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 crunched the numbers on thousands of publicly listed companies, we found that a boost from unusual items in a given year is often not repeated the next year. And that's as you'd expect, given these boosts are described as 'unusual'. We can see that PWF Corporation Bhd's positive unusual items were quite significant relative to its profit in the year to March 2021. As a result, we can surmise that the unusual items are making its statutory profit significantly stronger than it would otherwise be.
Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of PWF Corporation Bhd.
Our Take On PWF Corporation Bhd's Profit Performance
As previously mentioned, PWF Corporation Bhd's large boost from unusual items won't be there indefinitely, so its statutory earnings are probably a poor guide to its underlying profitability. For this reason, we think that PWF Corporation Bhd's statutory profits may be a bad guide to its underlying earnings power, and might give investors an overly positive impression of the company. On the bright side, the company showed enough improvement to book a profit this year, after losing money 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. So while earnings quality is important, it's equally important to consider the risks facing PWF Corporation Bhd at this point in time. To that end, you should learn about the 5 warning signs we've spotted with PWF Corporation Bhd (including 2 which are a bit unpleasant).
Today we've zoomed in on a single data point to better understand the nature of PWF Corporation Bhd's profit. But there is always more to discover if you are capable of focussing your mind on minutiae. Some people consider a high return on equity to be a good sign of a quality business. 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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