As a general rule, we think profitable companies are less risky than companies that lose money. Having said that, sometimes statutory profit levels are not a good guide to ongoing profitability, because some short term one-off factor has impacted profit levels. In this article, we’ll look at how useful this year’s statutory profit is, when analysing Zhengzhou Coal Mining Machinery Group (HKG:564).
While Zhengzhou Coal Mining Machinery Group was able to generate revenue of CN¥25.3b in the last twelve months, we think its profit result of CN¥1.06b was more important. Happily, it has grown both its profit and revenue over the last three years (though we note its revenue is down over the last year).
Importantly, statutory profits are not always the best tool for understanding a company’s true earnings power, so it’s well worth examining profits in a little more detail. This article will discuss how unusual items have impacted Zhengzhou Coal Mining Machinery Group’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.
The Impact Of Unusual Items On Profit
Importantly, our data indicates that Zhengzhou Coal Mining Machinery Group’s profit was reduced by CN¥386.2m, due to unusual items, over the last year. It’s never great to see unusual items costing the company profits, but on the upside, things might improve sooner rather than later. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. And that’s hardly a surprise given these line items are considered unusual. Assuming those unusual expenses don’t come up again, we’d therefore expect Zhengzhou Coal Mining Machinery Group to produce a higher profit next year, all else being equal.
Our Take On Zhengzhou Coal Mining Machinery Group’s Profit Performance
Because unusual items detracted from Zhengzhou Coal Mining Machinery Group’s earnings over the last year, you could argue that we can expect an improved result in the current quarter. Because of this, we think Zhengzhou Coal Mining Machinery Group’s earnings potential is at least as good as it seems, and maybe even better! And on top of that, its earnings per share have grown at an extremely impressive rate over the last three years. 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. So while earnings quality is important, it’s equally important to consider the risks facing Zhengzhou Coal Mining Machinery Group at this point in time. Every company has risks, and we’ve spotted 2 warning signs for Zhengzhou Coal Mining Machinery Group you should know about.
Today we’ve zoomed in on a single data point to better understand the nature of Zhengzhou Coal Mining Machinery Group’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 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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