Many investors consider it preferable to invest in profitable companies over unprofitable ones, because profitability suggests a business is sustainable. However, sometimes companies receive a one-off boost (or reduction) to their profit, and it's not always clear whether statutory profits are a good guide, going forward. In this article, we'll look at how useful this year's statutory profit is, when analysing Kinpo Electronics (TPE:2312).
While Kinpo Electronics was able to generate revenue of NT$125.6b in the last twelve months, we think its profit result of NT$275.8m was more important. As you can see in the chart below, its profit has declined over the last three years, even though its revenue has increased.
Of course, it is only sensible to look beyond the statutory profits and question how well those numbers represent the sustainable earnings power of the business. This article will focus on the impact unusual items have had on Kinpo Electronics' statutory earnings. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Kinpo Electronics.
How Do Unusual Items Influence Profit?
For anyone who wants to understand Kinpo Electronics' profit beyond the statutory numbers, it's important to note that during the last twelve months statutory profit gained from NT$185m worth of unusual items. While we like to see profit increases, we tend to be a little more cautious when unusual items have made a big contribution. We ran the numbers on most publicly listed companies worldwide, and it's very common for unusual items to be once-off in nature. And, after all, that's exactly what the accounting terminology implies. Kinpo Electronics had a rather significant contribution from unusual items relative to its profit to September 2020. As a result, we can surmise that the unusual items are making its statutory profit significantly stronger than it would otherwise be.
Our Take On Kinpo Electronics' Profit Performance
As we discussed above, we think the significant positive unusual item makes Kinpo Electronics'earnings a poor guide to its underlying profitability. As a result, we think it may well be the case that Kinpo Electronics' underlying earnings power is lower than its statutory profit. In further bad news, its earnings per share decreased in 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. If you'd like to know more about Kinpo Electronics 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 Kinpo Electronics (including 2 which are a bit concerning).
Today we've zoomed in on a single data point to better understand the nature of Kinpo Electronics' profit. But there are plenty of other ways to inform your opinion of a company. Some people consider a high return on equity to be a good sign of a quality business. 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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