A lackluster earnings announcement from Hong Leong Asia Ltd. (SGX:H22) last week didn't sink the stock price. Our analysis suggests that along with soft profit numbers, investors should be aware of some other underlying weaknesses in the numbers.

View our latest analysis for Hong Leong Asia

The Impact Of Unusual Items On Profit

To properly understand Hong Leong Asia's profit results, we need to consider the S$10m 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'. 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).

That might leave you wondering what analysts are forecasting in terms of future profitability. Luckily, you can click here to see an interactive graph depicting future profitability, based on their estimates.

Our Take On Hong Leong Asia's Profit Performance

Arguably, Hong Leong Asia's statutory earnings have been distorted by unusual items boosting profit. Therefore, it seems possible to us that Hong Leong Asia's true underlying earnings power is actually less than its statutory profit. But at least holders can take some solace from the 19% per annum growth in EPS for the last three. 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. If you'd like to know more about Hong Leong Asia as a business, it's important to be aware of any risks it's facing. While conducting our analysis, we found that Hong Leong Asia has 1 warning sign and it would be unwise to ignore this.

This note has only looked at a single factor that sheds light on the nature of Hong Leong Asia's 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. 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.