Anhui Honglu Steel Construction(Group)'s (SZSE:002541) Solid Earnings May Rest On Weak Foundations

Following the solid earnings report from Anhui Honglu Steel Construction(Group) CO., LTD (SZSE:002541), the market responded by bidding up the stock price. However, we think that shareholders should be cautious as we found some worrying factors underlying the profit.

Check out our latest analysis for Anhui Honglu Steel Construction(Group)

How Do Unusual Items Influence Profit?

For anyone who wants to understand Anhui Honglu Steel Construction(Group)'s profit beyond the statutory numbers, it's important to note that during the last twelve months statutory profit gained from CN¥340m 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 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).

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.

Our Take On Anhui Honglu Steel Construction(Group)'s Profit Performance

Arguably, Anhui Honglu Steel Construction(Group)'s statutory earnings have been distorted by unusual items boosting profit. Therefore, it seems possible to us that Anhui Honglu Steel Construction(Group)'s true underlying earnings power is actually less than its statutory profit. But at least holders can take some solace from the 45% per annum growth in EPS for the last three. 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. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. Case in point: We've spotted 3 warning signs for Anhui Honglu Steel Construction(Group) you should be mindful of and 1 of these can't be ignored.

This note has only looked at a single factor that sheds light on the nature of Anhui Honglu Steel Construction(Group)'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. 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.

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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.