Here's Why We Think Leechi Machinery Industry's (TPE:1517) Statutory Earnings Might Be Conservative

It might be old fashioned, but we really like to invest in companies that make a profit, each and every year. That said, the current statutory profit is not always a good guide to a company's underlying profitability. In this article, we'll look at how useful this year's statutory profit is, when analysing Leechi Machinery Industry (TPE:1517).

We like the fact that Leechi Machinery Industry made a profit of NT$32.8m on its revenue of NT$3.04b, in the last year.

See our latest analysis for Leechi Machinery Industry

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 Leechi Machinery Industry's statutory earnings. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Leechi Machinery Industry.

The Impact Of Unusual Items On Profit

To properly understand Leechi Machinery Industry's profit results, we need to consider the NT$29m expense attributed to unusual items. It's never great to see unusual items costing the company profits, but on the upside, things might improve sooner rather than later. 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. In the twelve months to September 2020, Leechi Machinery Industry had a big unusual items expense. All else being equal, this would likely have the effect of making the statutory profit look worse than its underlying earnings power.

Our Take On Leechi Machinery Industry's Profit Performance

As we discussed above, we think the significant unusual expense will make Leechi Machinery Industry's statutory profit lower than it would otherwise have been. Based on this observation, we consider it possible that Leechi Machinery Industry's statutory profit actually understates its earnings potential! And one can definitely find a positive in the fact that it made a profit this year, despite losing money last year. The goal of this article has been to assess how well we can rely on the statutory earnings to reflect the company's potential, but there is plenty more to consider. So while earnings quality is important, it's equally important to consider the risks facing Leechi Machinery Industry at this point in time. Every company has risks, and we've spotted 2 warning signs for Leechi Machinery Industry (of which 1 is potentially serious!) you should know about.

Today we've zoomed in on a single data point to better understand the nature of Leechi Machinery Industry's profit. But there is always more to discover if you are capable of focussing your mind on minutiae. Some people consider a high return on equity to be a good sign of a quality business. 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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