Shareholders didn't seem to be thrilled with Sakae Holdings Ltd.'s (SGX:5DO) recent earnings report, despite healthy profit numbers. Our analysis suggests they may be concerned about some underlying details.
How Do Unusual Items Influence Profit?
To properly understand Sakae Holdings' profit results, we need to consider the S$2.7m gain attributed to unusual items. While it's always nice to have higher profit, a large contribution from unusual items sometimes dampens our enthusiasm. 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. Sakae Holdings had a rather significant contribution from unusual items relative to its profit to June 2021. All else being equal, this would likely have the effect of making the statutory profit a poor guide to underlying earnings power.
Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Sakae Holdings.
An Unusual Tax Situation
Just as we noted the unusual items, we must inform you that Sakae Holdings received a tax benefit which contributed S$57k to the bottom line. This is of course a bit out of the ordinary, given it is more common for companies to be paying tax than receiving tax benefits! Of course, prima facie it's great to receive a tax benefit. And given that it lost money last year, it seems possible that the benefit is evidence that it now expects to find value in its past tax losses. However, the devil in the detail is that these kind of benefits only impact in the year they are booked, and are often one-off in nature. In the likely event the tax benefit is not repeated, we'd expect to see its statutory profit levels drop, at least in the absence of strong growth. So while we think it's great to receive a tax benefit, it does tend to imply an increased risk that the statutory profit overstates the sustainable earnings power of the business.
Our Take On Sakae Holdings' Profit Performance
In the last year Sakae Holdings received a tax benefit, which boosted its profit in a way that might not be much more sustainable than turning prime farmland into gas fields. And on top of that, it also saw an unusual item boost its profit, suggesting that next year might see a lower profit number, if these events are not repeated. Considering all this we'd argue Sakae Holdings' profits probably give an overly generous impression of its sustainable level of profitability. If you'd like to know more about Sakae Holdings as a business, it's important to be aware of any risks it's facing. To that end, you should learn about the 5 warning signs we've spotted with Sakae Holdings (including 2 which are concerning).
In this article we've looked at a number of factors that can impair the utility of profit numbers, and we've come away cautious. 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.
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