Should You Rely On Taihan Precision Technology's (GTSM:1336) Earnings Growth?

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 Taihan Precision Technology's (GTSM:1336) statutory profits are a good guide to its underlying earnings.

It's good to see that over the last twelve months Taihan Precision Technology made a profit of NT$240.5m on revenue of NT$1.96b. The chart below shows how profit has actually increased over the last three years, even while revenue has declined.

Check out our latest analysis for Taihan Precision Technology

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 focus on the impact unusual items have had on Taihan Precision Technology's statutory earnings. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Taihan Precision Technology.

How Do Unusual Items Influence Profit?

To properly understand Taihan Precision Technology's profit results, we need to consider the NT$223m gain attributed to unusual items. While it's always nice to have higher profit, a large contribution from unusual items sometimes dampens our enthusiasm. When we crunched the numbers on thousands of publicly listed companies, we found that a boost from unusual items in a given year is often not repeated the next year. And, after all, that's exactly what the accounting terminology implies. Taihan Precision Technology 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 Taihan Precision Technology's Profit Performance

As we discussed above, we think the significant positive unusual item makes Taihan Precision Technology'searnings a poor guide to its underlying profitability. As a result, we think it may well be the case that Taihan Precision Technology's underlying earnings power is lower than its statutory profit. But on the bright side, its earnings per share have grown at an extremely impressive rate over the last three years. 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. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. Every company has risks, and we've spotted 2 warning signs for Taihan Precision Technology you should know about.

This note has only looked at a single factor that sheds light on the nature of Taihan Precision Technology'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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