We Wouldn’t Rely On China Aerospace International Holdings’s (HKG:31) Statutory Earnings As A Guide

As a general rule, we think profitable companies are less risky than companies that lose money. However, sometimes companies receive a one-off boost (or reduction) to their profit, and it’s not always clear whether statutory profits are a good guide, going forward. In this article, we’ll look at how useful this year’s statutory profit is, when analysing China Aerospace International Holdings (HKG:31).

It’s good to see that over the last twelve months China Aerospace International Holdings made a profit of HK$365.6m on revenue of HK$3.57b. 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.

View our latest analysis for China Aerospace International Holdings

SEHK:31 Income Statement, January 27th 2020
SEHK:31 Income Statement, January 27th 2020

Not all profits are equal, and we can learn more about the nature of a company’s past profitability by diving deeper into the financial statements. This article will focus on the impact unusual items have had on China Aerospace International Holdings’s statutory earnings. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of China Aerospace International Holdings.

The Impact Of Unusual Items On Profit

For anyone who wants to understand China Aerospace International Holdings’s profit beyond the statutory numbers, it’s important to note that during the last twelve months statutory profit gained from HK$249m worth of unusual items. While it’s always nice to have higher profit, a large contribution from unusual items sometimes dampens our enthusiasm. 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, after all, that’s exactly what the accounting terminology implies. We can see that China Aerospace International Holdings’s positive unusual items were quite significant relative to its profit in the year to June 2019. All else being equal, this would likely have the effect of making the statutory profit a poor guide to underlying earnings power.

Our Take On China Aerospace International Holdings’s Profit Performance

As previously mentioned, China Aerospace International Holdings’s large boost from unusual items won’t be there indefinitely, so its statutory earnings are probably a poor guide to its underlying profitability. As a result, we think it may well be the case that China Aerospace International Holdings’s underlying earnings power is lower than its statutory profit. Sadly, its EPS was down over the last twelve months. 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. Just as investors must consider earnings, it is also important to take into account the strength of a company’s balance sheet. If you’re interestedwe have a graphic representation of China Aerospace International Holdings’s balance sheet.

This note has only looked at a single factor that sheds light on the nature of China Aerospace International Holdings’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. 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.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.