Investors were disappointed by Kato (Hong Kong) Holdings Limited's (HKG:2189 ) latest earnings release. Our analysis has found some reasons to be concerned, beyond the weak headline numbers.

Check out our latest analysis for Kato (Hong Kong) Holdings

How Do Unusual Items Influence Profit?

For anyone who wants to understand Kato (Hong Kong) Holdings' profit beyond the statutory numbers, it's important to note that during the last twelve months statutory profit gained from HK$19m worth of unusual items. While it's always nice to have higher profit, a large contribution from unusual items sometimes dampens our enthusiasm. 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. And that's as you'd expect, given these boosts are described as 'unusual'. If Kato (Hong Kong) Holdings 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 Kato (Hong Kong) Holdings.

Our Take On Kato (Hong Kong) Holdings' Profit Performance

Arguably, Kato (Hong Kong) Holdings' statutory earnings have been distorted by unusual items boosting profit. Therefore, it seems possible to us that Kato (Hong Kong) Holdings' true underlying earnings power is actually less than its statutory profit. Nonetheless, it's still worth noting that its earnings per share have grown at 46% over the last three years. 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. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. You'd be interested to know, that we found 3 warning signs for Kato (Hong Kong) Holdings and you'll want to know about them.

This note has only looked at a single factor that sheds light on the nature of Kato (Hong Kong) Holdings' profit. But there are plenty of other ways to inform your opinion of a company. 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.

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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.