Statistically speaking, it is less risky to invest in profitable companies than in unprofitable ones. 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 Hold-Key Electric Wire & Cable's (TPE:1618) statutory profits are a good guide to its underlying earnings.
We like the fact that Hold-Key Electric Wire & Cable made a profit of NT$158.4m on its revenue of NT$2.72b, in the last year.
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 discuss how unusual items have impacted Hold-Key Electric Wire & Cable's most recent profit results. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Hold-Key Electric Wire & Cable.
How Do Unusual Items Influence Profit?
For anyone who wants to understand Hold-Key Electric Wire & Cable's profit beyond the statutory numbers, it's important to note that during the last twelve months statutory profit gained from NT$11m worth of unusual items. We can't deny that higher profits generally leave us optimistic, but we'd prefer it if the profit were to be sustainable. 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. Assuming those unusual items don't show up again in the current year, we'd thus expect profit to be weaker next year (in the absence of business growth, that is).
Our Take On Hold-Key Electric Wire & Cable's Profit Performance
Arguably, Hold-Key Electric Wire & Cable's statutory earnings have been distorted by unusual items boosting profit. Therefore, it seems possible to us that Hold-Key Electric Wire & Cable's true underlying earnings power is actually less than its statutory profit. On the bright side, the company showed enough improvement to book a profit this year, after losing money last year. 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 Hold-Key Electric Wire & Cable at this point in time. At Simply Wall St, we found 1 warning sign for Hold-Key Electric Wire & Cable and we think they deserve your attention.
This note has only looked at a single factor that sheds light on the nature of Hold-Key Electric Wire & Cable's 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. 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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