Stock Analysis

We're Not So Sure You Should Rely on D-Link's (TPE:2332) Statutory Earnings

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TWSE:2332
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Many investors consider it preferable to invest in profitable companies over unprofitable ones, because profitability suggests a business is sustainable. That said, the current statutory profit is not always a good guide to a company's underlying profitability. This article will consider whether D-Link's (TPE:2332) statutory profits are a good guide to its underlying earnings.

While D-Link was able to generate revenue of NT$15.5b in the last twelve months, we think its profit result of NT$217.6m was more important. The chart below shows that while revenue has fallen over the last three years, the company has moved from unprofitable to profitable.

Check out our latest analysis for D-Link

earnings-and-revenue-history
TSEC:2332 Earnings and Revenue History December 3rd 2020

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 discuss how unusual items have impacted D-Link'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 D-Link.

How Do Unusual Items Influence Profit?

Importantly, our data indicates that D-Link's profit received a boost of NT$232m in unusual items, over the last year. We can't deny that higher profits generally leave us optimistic, but we'd prefer it if the profit were to be sustainable. 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. We can see that D-Link's positive unusual items were quite significant relative to its profit in the year to September 2020. All else being equal, this would likely have the effect of making the statutory profit a poor guide to underlying earnings power.

Our Take On D-Link's Profit Performance

As we discussed above, we think the significant positive unusual item makes D-Link'searnings a poor guide to its underlying profitability. For this reason, we think that D-Link's statutory profits may be a bad guide to its underlying earnings power, and might give investors an overly positive impression of the company. The good news is that it earned a profit in the last twelve months, despite its previous loss. 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. In light of this, if you'd like to do more analysis on the company, it's vital to be informed of the risks involved. In terms of investment risks, we've identified 2 warning signs with D-Link, and understanding them should be part of your investment process.

Today we've zoomed in on a single data point to better understand the nature of D-Link'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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About TWSE:2332

D-Link

D-Link Corporation researches, develops, and sells local area computer network systems, wireless local area computer networks, and spare parts for integrated circuits in Taiwan and internationally.

Excellent balance sheet with questionable track record.

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