As a general rule, we think profitable companies are less risky than companies that lose money. 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 Dynamic Electronics (TPE:6251).
While Dynamic Electronics was able to generate revenue of NT$13.2b in the last twelve months, we think its profit result of NT$830.4m was more important.
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 Dynamic Electronics’ statutory earnings. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Dynamic Electronics.
The Impact Of Unusual Items On Profit
To properly understand Dynamic Electronics’ profit results, we need to consider the NT$256m gain attributed to 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 analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. Which is hardly surprising, given the name. Dynamic Electronics had a rather significant contribution from unusual items relative to its profit to June 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 Dynamic Electronics’ Profit Performance
As previously mentioned, Dynamic Electronics’ large boost from unusual items won’t be there indefinitely, so its statutory earnings are probably a poor guide to its underlying profitability. For this reason, we think that Dynamic Electronics’ statutory profits may be a bad guide to its underlying earnings power, and might give investors an overly positive impression of the company. But the happy news is that, while acknowledging we have to look beyond the statutory numbers, those numbers are still improving, with EPS growing at a very high rate over the last year. 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 Dynamic Electronics at this point in time. For example – Dynamic Electronics has 2 warning signs we think you should be aware of.
Today we’ve zoomed in on a single data point to better understand the nature of Dynamic Electronics’ profit. But there are plenty of other ways to inform your opinion of a company. Some people consider a high return on equity to be a good sign of a quality business. 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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