The market wasn't impressed with the soft earnings from San Miguel Brewery Hong Kong Limited (HKG:236) recently. We did some analysis, and found that there are some reasons to be cautious about the headline numbers.
An Unusual Tax Situation
We can see that San Miguel Brewery Hong Kong received a tax benefit of HK$21m. This is of course a bit out of the ordinary, given it is more common for companies to be paying tax than receiving tax benefits! Of course, prima facie it's great to receive a tax benefit. However, our data indicates that tax benefits can temporarily boost statutory profit in the year it is booked, but subsequently profit may fall back. Assuming the tax benefit is not repeated every year, we could see its profitability drop noticeably, all else being equal.
Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of San Miguel Brewery Hong Kong.
Our Take On San Miguel Brewery Hong Kong's Profit Performance
San Miguel Brewery Hong Kong reported that it received a tax benefit, rather than paid tax, in its last report. As a result we don't think its profit result, which includes that tax-boost, is a good guide to its sustainable profit levels. Because of this, we think that it may be that San Miguel Brewery Hong Kong's statutory profits are better than its underlying earnings power. But the good news is that its EPS growth over the last three years has been very impressive. 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. So while earnings quality is important, it's equally important to consider the risks facing San Miguel Brewery Hong Kong at this point in time. At Simply Wall St, we found 2 warning signs for San Miguel Brewery Hong Kong and we think they deserve your attention.
Today we've zoomed in on a single data point to better understand the nature of San Miguel Brewery Hong Kong's 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. 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.
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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.
