As a general rule, we think profitable companies are less risky than companies that lose money. That said, the current statutory profit is not always a good guide to a company’s underlying profitability. This article will consider whether Casablanca Group‘s (HKG:2223) statutory profits are a good guide to its underlying earnings.
While Casablanca Group was able to generate revenue of HK$374.1m in the last twelve months, we think its profit result of HK$22.2m was more important. Even though revenue has remained steady over the last three years, you can see in the chart below that the company has moved from loss-making to profitable.
View our latest analysis for Casablanca Group
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 Casablanca Group’s statutory earnings. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Casablanca Group.
How Do Unusual Items Influence Profit?
Importantly, our data indicates that Casablanca Group’s profit received a boost of HK$3.6m in unusual items, over the last year. We can’t deny that higher profits generally leave us optmistic, 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. Which is hardly suprising, given the name. Assuming those unusual items don’t show up again in the current year, we’d thus expect profit to be weaker next year (in the absence of business growth, that is).
Our Take On Casablanca Group’s Profit Performance
We’d posit that Casablanca Group’s statutory earnings aren’t a clean read on ongoing productivity, due to the large unusual item. Because of this, we think that it may be that Casablanca Group’s statutory profits are better than its underlying earnings power. The silver lining is that its EPS growth over the last year has been really wonderful, even if it’s not a perfect measure. 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. Just as investors must consider earnings, it is also important to take into account the strength of a company’s balance sheet. You can seeour latest analysis on Casablanca Group’s balance sheet health here.
Today we’ve zoomed in on a single data point to better understand the nature of Casablanca Group’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.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.
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January 02, 2020 at 02:41PM
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Does Casablanca Group’s (HKG:2223) Statutory Profit Adequately Reflect Its Underlying Profit? - Simply Wall St
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