Stock Analysis

We're Not So Sure You Should Rely on Melewar Industrial Group Berhad's (KLSE:MELEWAR) Statutory Earnings

  •  Updated
Source: Shutterstock

Many investors consider it preferable to invest in profitable companies over unprofitable ones, because profitability suggests a business is sustainable. That said, the current statutory profit is not always a good guide to a company's underlying profitability. This article will consider whether Melewar Industrial Group Berhad's (KLSE:MELEWAR) statutory profits are a good guide to its underlying earnings.

While Melewar Industrial Group Berhad was able to generate revenue of RM568.7m in the last twelve months, we think its profit result of RM5.45m 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 Melewar Industrial Group Berhad

KLSE:MELEWAR Earnings and Revenue History December 14th 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 Melewar Industrial Group Berhad's statutory earnings. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Melewar Industrial Group Berhad.

How Do Unusual Items Influence Profit?

To properly understand Melewar Industrial Group Berhad's profit results, we need to consider the RM1.9m 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. We ran the numbers on most publicly listed companies worldwide, and it's very common for unusual items to be once-off in nature. Which is hardly surprising, given the name. Melewar Industrial Group 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 Melewar Industrial Group Berhad's Profit Performance

As we discussed above, we think the significant positive unusual item makes Melewar Industrial Group Berhad'searnings a poor guide to its underlying profitability. For this reason, we think that Melewar Industrial Group 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. Sadly, its EPS was down over the last twelve months. 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 Melewar Industrial Group Berhad at this point in time. In terms of investment risks, we've identified 4 warning signs with Melewar Industrial Group Berhad, and understanding them should be part of your investment process.

Today we've zoomed in on a single data point to better understand the nature of Melewar Industrial Group 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. 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.

If you decide to trade Melewar Industrial Group Berhad, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account. Promoted

Valuation is complex, but we're helping make it simple.

Find out whether Melewar Industrial Group Berhad is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

View the Free Analysis