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Are Deswell Industries’s (NASDAQ:DSWL) Statutory Earnings A Good Reflection Of Its Earnings Potential? – Simply Wall St


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. Today we’ll focus on whether this year’s statutory profits are a good guide to understanding Deswell Industries (NASDAQ:DSWL).

It’s good to see that over the last twelve months Deswell Industries made a profit of US$2.77m on revenue of US$69.5m. The good news is that the company managed to grow its revenue over the last three years, and also move from loss-making to profitable.

Check out our latest analysis for Deswell Industries

NasdaqGM:DSWL Income Statement April 6th 2020
NasdaqGM:DSWL Income Statement April 6th 2020

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 discuss how unusual items have impacted Deswell Industries’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 Deswell Industries.

How Do Unusual Items Influence Profit?

For anyone who wants to understand Deswell Industries’s profit beyond the statutory numbers, it’s important to note that during the last twelve months statutory profit was reduced by US$746k due to unusual items. While deductions due to unusual items are disappointing in the first instance, there is a silver lining. We looked at thousands of listed companies and found that unusual items are very often one-off in nature. And, after all, that’s exactly what the accounting terminology implies. Assuming those unusual expenses don’t come up again, we’d therefore expect Deswell Industries to produce a higher profit next year, all else being equal.

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Our Take On Deswell Industries’s Profit Performance

Unusual items (expenses) detracted from Deswell Industries’s earnings over the last year, but we might see an improvement next year. Based on this observation, we consider it likely that Deswell Industries’s statutory profit actually understates its earnings potential! On the other hand, its EPS actually shrunk in the last twelve months. 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. If you’d like to know more about Deswell Industries as a business, it’s important to be aware of any risks it’s facing. You’d be interested to know, that we found 3 warning signs for Deswell Industries and you’ll want to know about them.

Today we’ve zoomed in on a single data point to better understand the nature of Deswell Industries’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.

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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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