Are China Communications Construction’s (HKG:1800) Statutory Earnings A Good Guide To Its Underlying Profitability?

As a general rule, we think profitable companies are less risky than companies that lose money. That said, the current statutory profit is not always a good guide to a company’s underlying profitability. This article will consider whether China Communications Construction’s (HKG:1800) statutory profits are a good guide to its underlying earnings.

While China Communications Construction was able to generate revenue of CN¥560.6b in the last twelve months, we think its profit result of CN¥15.3b was more important. While it managed to grow its revenue over the last three years, its profit has moved in the other direction, as you can see in the chart below.

Check out our latest analysis for China Communications Construction

earnings-and-revenue-history
SEHK:1800 Earnings and Revenue History September 22nd 2020

Of course, it is only sensible to look beyond the statutory profits and question how well those numbers represent the sustainable earnings power of the business. This article will discuss how unusual items have impacted China Communications Construction’s most recent profit results. 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.

How Do Unusual Items Influence Profit?

Importantly, our data indicates that China Communications Construction’s profit received a boost of CN¥2.3b in unusual items, over the last year. We can’t deny that higher profits generally leave us optimistic, but we’d prefer it if the profit were to be sustainable. We ran the numbers on most publicly listed companies worldwide, and it’s very common for unusual items to be once-off in nature. 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).

Our Take On China Communications Construction’s Profit Performance

Arguably, China Communications Construction’s statutory earnings have been distorted by unusual items boosting profit. Because of this, we think that it may be that China Communications Construction’s statutory profits are better than its underlying earnings power. Sadly, its EPS was down over the last twelve months. 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. In light of this, if you’d like to do more analysis on the company, it’s vital to be informed of the risks involved. While conducting our analysis, we found that China Communications Construction has 1 warning sign and it would be unwise to ignore this.

Today we’ve zoomed in on a single data point to better understand the nature of China Communications Construction’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. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.

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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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