Broadly speaking, profitable businesses are less risky than unprofitable ones. 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 Yuanda China Holdings (HKG:2789).
We like the fact that Yuanda China Holdings made a profit of CN¥90.7m on its revenue of CN¥4.25b, in the last year. The chart below shows that while revenue has fallen over the last three years, the company has moved from unprofitable to profitable.
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 Yuanda China Holdings’s most recent profit results. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Yuanda China Holdings.
The Impact Of Unusual Items On Profit
For anyone who wants to understand Yuanda China Holdings’s profit beyond the statutory numbers, it’s important to note that during the last twelve months statutory profit gained from CN¥138m worth of unusual items. While we like to see profit increases, we tend to be a little more cautious when unusual items have made a big contribution. 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’. We can see that Yuanda China Holdings’s positive unusual items were quite significant relative to its profit in the year to June 2019. As a result, we can surmise that the unusual items are making its statutory profit significantly stronger than it would otherwise be.
Our Take On Yuanda China Holdings’s Profit Performance
As we discussed above, we think the significant positive unusual item makes Yuanda China Holdings’s earnings a poor guide to its underlying profitability. As a result, we think it may well be the case that Yuanda China Holdings’s underlying earnings power is lower than its statutory profit. The good news is that, its earnings per share increased by 31% in the last year. 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 want to,you can see our take on Yuanda China Holdings’s balance sheet by clicking here.
This note has only looked at a single factor that sheds light on the nature of Yuanda China Holdings’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 that insiders are buying.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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.
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