Pacific Online's (HKG:543) Profits May Not Reveal Underlying Issues
Pacific Online Limited (HKG:543) reported solid earnings, leading to a stock price increase. However, caution is advised as profits may be inflated by a CN¥5.2m gain from unusual items, which may not recur. This raises concerns about the sustainability of profit levels. Despite a 58% increase in earnings per share over the last year, the underlying earnings power may be less than indicated. Additionally, there are four warning signs regarding the company's risks that investors should consider before further analysis.
Following the solid earnings report from Pacific Online Limited (HKG:543), the market responded by bidding up the stock price. However, we think that shareholders should be cautious as we found some worrying factors underlying the profit.
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How Do Unusual Items Influence Profit?
To properly understand Pacific Online's profit results, we need to consider the CN¥5.2m gain attributed to unusual items. While it's always nice to have higher profit, a large contribution from unusual items sometimes dampens our enthusiasm. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. And that's as you'd expect, given these boosts are described as 'unusual'. If Pacific Online doesn't see that contribution repeat, then all else being equal we'd expect its profit to drop over the current year.
Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Pacific Online.
Our Take On Pacific Online's Profit Performance
We'd posit that Pacific Online's statutory earnings aren't a clean read on ongoing productivity, due to the large unusual item. Therefore, it seems possible to us that Pacific Online's true underlying earnings power is actually less than its statutory profit. The good news is that, its earnings per share increased by 58% in the last year. 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 want to do dive deeper into Pacific Online, you'd also look into what risks it is currently facing. For example, we've found that Pacific Online has 4 warning signs (2 are a bit concerning!) that deserve your attention before going any further with your analysis.
This note has only looked at a single factor that sheds light on the nature of Pacific Online's profit. But there is always more to discover if you are capable of focussing your mind on minutiae. Some people consider a high return on equity to be a good sign of a quality business. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks with high insider ownership.
