Here's Why We Don't Think Sungei Bagan Rubber Company (Malaya) Berhad's (KLSE:SBAGAN) Statutory Earnings Reflect Its Underlying Earnings Potential

As a general rule, we think profitable companies are less risky than companies that lose money. Having said that, sometimes statutory profit levels are not a good guide to ongoing profitability, because some short term one-off factor has impacted profit levels. Today we'll focus on whether this year's statutory profits are a good guide to understanding Sungei Bagan Rubber Company (Malaya) Berhad (KLSE:SBAGAN).

We like the fact that Sungei Bagan Rubber Company (Malaya) Berhad made a profit of RM8.88m on its revenue of RM16.0m, in the last year. The chart below shows that revenue has improved over the last three years, and, even better, the company has moved from unprofitable to profitable.

See our latest analysis for Sungei Bagan Rubber Company (Malaya) Berhad

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 Sungei Bagan Rubber Company (Malaya) Berhad's statutory earnings. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Sungei Bagan Rubber Company (Malaya) Berhad.

How Do Unusual Items Influence Profit?

To properly understand Sungei Bagan Rubber Company (Malaya) Berhad's profit results, we need to consider the RM6.1m gain attributed to 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, after all, that's exactly what the accounting terminology implies. Sungei Bagan Rubber Company (Malaya) Berhad had a rather significant contribution from unusual items relative to its profit to September 2020. As a result, we can surmise that the unusual items are making its statutory profit significantly stronger than it would otherwise be.

Our Take On Sungei Bagan Rubber Company (Malaya) Berhad's Profit Performance

As we discussed above, we think the significant positive unusual item makes Sungei Bagan Rubber Company (Malaya) Berhad'searnings a poor guide to its underlying profitability. For this reason, we think that Sungei Bagan Rubber Company (Malaya) Berhad's statutory profits may be a bad guide to its underlying earnings power, and might give investors an overly positive impression of the company. The good news is that it earned a profit in the last twelve months, despite its previous loss. Of course, we've only just scratched the surface when it comes to analysing its earnings; one could also consider margins, forecast growth, and return on investment, among other factors. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. In terms of investment risks, we've identified 3 warning signs with Sungei Bagan Rubber Company (Malaya) Berhad, and understanding them should be part of your investment process.

This note has only looked at a single factor that sheds light on the nature of Sungei Bagan Rubber Company (Malaya) Berhad's profit. But there are plenty of other ways to inform your opinion of a company. 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. 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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