Stock Analysis

Are Wing Tai Holdings's (SGX:W05) Statutory Earnings A Good Reflection Of Its Earnings Potential?

SGX:W05
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Many investors consider it preferable to invest in profitable companies over unprofitable ones, because profitability suggests a business is sustainable. 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. This article will consider whether Wing Tai Holdings' (SGX:W05) statutory profits are a good guide to its underlying earnings.

We like the fact that Wing Tai Holdings made a profit of S$3.10m on its revenue of S$371.0m, in the last year. The chart below shows how it has grown revenue over the last three years, but that profit has declined.

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earnings-and-revenue-history
SGX:W05 Earnings and Revenue History December 16th 2020

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 Wing Tai Holdings' statutory earnings. That might leave you wondering what analysts are forecasting in terms of future profitability. Luckily, you can click here to see an interactive graph depicting future profitability, based on their estimates.

How Do Unusual Items Influence Profit?

To properly understand Wing Tai Holdings' profit results, we need to consider the S$11m expense attributed to unusual items. While deductions due to unusual items are disappointing in the first instance, there is a silver lining. We looked at thousands of listed companies and found that unusual items are very often one-off in nature. And, after all, that's exactly what the accounting terminology implies. If Wing Tai 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 Wing Tai Holdings' Profit Performance

Unusual items (expenses) detracted from Wing Tai Holdings' earnings over the last year, but we might see an improvement next year. Based on this observation, we consider it likely that Wing Tai Holdings' statutory profit actually understates its earnings potential! Unfortunately, though, its earnings per share actually fell back over the last year. 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. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. For example, we've discovered 2 warning signs that you should run your eye over to get a better picture of Wing Tai Holdings.

This note has only looked at a single factor that sheds light on the nature of Wing Tai Holdings' 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.

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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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