Hosken Consolidated Investments' (JSE:HCI) Earnings Are Of Questionable Quality

Despite announcing strong earnings, Hosken Consolidated Investments Limited's (JSE:HCI) stock was sluggish. We did some digging and found some worrying underlying problems.

Check out the opportunities and risks within the ZA Industrials industry.

How Do Unusual Items Influence Profit?

For anyone who wants to understand Hosken Consolidated Investments' profit beyond the statutory numbers, it's important to note that during the last twelve months statutory profit gained from R1.4b worth of unusual items. 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 that's as you'd expect, given these boosts are described as 'unusual'. We can see that Hosken Consolidated Investments' positive unusual items were quite significant relative to its profit in the year to September 2022. As a result, we can surmise that the unusual items are making its statutory profit significantly stronger than it would otherwise be.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Hosken Consolidated Investments.

Our Take On Hosken Consolidated Investments' Profit Performance

As we discussed above, we think the significant positive unusual item makes Hosken Consolidated Investments' earnings a poor guide to its underlying profitability. As a result, we think it may well be the case that Hosken Consolidated Investments' underlying earnings power is lower than its statutory profit. The silver lining is that its EPS growth over the last year has been really wonderful, even if it's not a perfect measure. 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. So while earnings quality is important, it's equally important to consider the risks facing Hosken Consolidated Investments at this point in time. When we did our research, we found 2 warning signs for Hosken Consolidated Investments (1 doesn't sit too well with us!) that we believe deserve your full attention.

Today we've zoomed in on a single data point to better understand the nature of Hosken Consolidated Investments' profit. But there are plenty of other ways to inform your opinion of a company. 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. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.