Are Shinkong Synthetic Fibers's (TPE:1409) Statutory Earnings A Good Guide To Its Underlying Profitability?

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. In this article, we'll look at how useful this year's statutory profit is, when analysing Shinkong Synthetic Fibers (TPE:1409).

We like the fact that Shinkong Synthetic Fibers made a profit of NT$564.1m on its revenue of NT$33.1b, in the last year. The chart below shows that both revenue and profit have declined over the last three years.

See our latest analysis for Shinkong Synthetic Fibers

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 Shinkong Synthetic Fibers' statutory earnings. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Shinkong Synthetic Fibers.

How Do Unusual Items Influence Profit?

To properly understand Shinkong Synthetic Fibers' profit results, we need to consider the NT$586m 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. We looked at thousands of listed companies and found that unusual items are very often one-off in nature. And that's hardly a surprise given these line items are considered unusual. If Shinkong Synthetic Fibers doesn't see those unusual expenses repeat, then all else being equal we'd expect its profit to increase over the coming year.

Our Take On Shinkong Synthetic Fibers' Profit Performance

Because unusual items detracted from Shinkong Synthetic Fibers' earnings over the last year, you could argue that we can expect an improved result in the current quarter. Based on this observation, we consider it likely that Shinkong Synthetic Fibers' statutory profit actually understates its earnings potential! On the other hand, its EPS actually shrunk in the last twelve months. 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. If you want to do dive deeper into Shinkong Synthetic Fibers, you'd also look into what risks it is currently facing. Our analysis shows 5 warning signs for Shinkong Synthetic Fibers (1 is significant!) 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 Shinkong Synthetic Fibers' 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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