We Think Nan Ren Lake Leisure Amusement's (GTSM:5905) Statutory Profit Might Understate Its Earnings Potential

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. Today we'll focus on whether this year's statutory profits are a good guide to understanding Nan Ren Lake Leisure Amusement (GTSM:5905).

We like the fact that Nan Ren Lake Leisure Amusement made a profit of NT$28.4m on its revenue of NT$1.20b, in the last year. In the last few years both its revenue and its profit have fallen, as you can see in the chart below.

Check out our latest analysis for Nan Ren Lake Leisure Amusement

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 discuss how unusual items have impacted Nan Ren Lake Leisure Amusement'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 Nan Ren Lake Leisure Amusement.

The Impact Of Unusual Items On Profit

For anyone who wants to understand Nan Ren Lake Leisure Amusement's profit beyond the statutory numbers, it's important to note that during the last twelve months statutory profit was reduced by NT$15m due to unusual items. While deductions due to unusual items are disappointing in the first instance, there is a silver lining. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. And that's hardly a surprise given these line items are considered unusual. Nan Ren Lake Leisure Amusement took a rather significant hit from unusual items in the year to September 2020. As a result, we can surmise that the unusual items made its statutory profit significantly weaker than it would otherwise be.

Our Take On Nan Ren Lake Leisure Amusement's Profit Performance

As we discussed above, we think the significant unusual expense will make Nan Ren Lake Leisure Amusement's statutory profit lower than it would otherwise have been. Based on this observation, we consider it possible that Nan Ren Lake Leisure Amusement's statutory profit actually understates its earnings potential! On the other hand, its EPS actually shrunk in the last twelve months. 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 Nan Ren Lake Leisure Amusement at this point in time. Our analysis shows 4 warning signs for Nan Ren Lake Leisure Amusement (1 can't be ignored!) and we strongly recommend you look at them before investing.

This note has only looked at a single factor that sheds light on the nature of Nan Ren Lake Leisure Amusement's 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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