Should You Use Hock Lian Seng Holdings's (SGX:J2T) Statutory Earnings To Analyse It?

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. In this article, we'll look at how useful this year's statutory profit is, when analysing Hock Lian Seng Holdings (SGX:J2T).

While Hock Lian Seng Holdings was able to generate revenue of S$133.7m in the last twelve months, we think its profit result of S$10.9m was more important. The chart below shows how it has grown revenue over the last three years, but that profit has declined.

View our latest analysis for Hock Lian Seng Holdings

Not all profits are equal, and we can learn more about the nature of a company's past profitability by diving deeper into the financial statements. This article will focus on the impact unusual items have had on Hock Lian Seng Holdings' statutory earnings. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Hock Lian Seng Holdings.

How Do Unusual Items Influence Profit?

Importantly, our data indicates that Hock Lian Seng Holdings' profit was reduced by S$1.7m, due to unusual items, over the last year. While deductions due to unusual items are disappointing in the first instance, there is a silver lining. 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. If Hock Lian Seng Holdings 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 Hock Lian Seng Holdings' Profit Performance

Because unusual items detracted from Hock Lian Seng Holdings' earnings over the last year, you could argue that we can expect an improved result in the current quarter. Because of this, we think Hock Lian Seng Holdings' earnings potential is at least as good as it seems, and maybe even better! On the other hand, its EPS actually shrunk in the last twelve months. 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. So while earnings quality is important, it's equally important to consider the risks facing Hock Lian Seng Holdings at this point in time. Be aware that Hock Lian Seng Holdings is showing 3 warning signs in our investment analysis and 1 of those is concerning...

Today we've zoomed in on a single data point to better understand the nature of Hock Lian Seng Holdings' profit. But there is always more to discover if you are capable of focussing your mind on minutiae. 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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