Hanshang Group's (SHSE:600774) Shareholders Have More To Worry About Than Only Soft Earnings

The market wasn't impressed with the soft earnings from Hanshang Group Co., Ltd. (SHSE:600774) recently. We did some further digging and think they have a few more reasons to be concerned beyond the statutory profit.

Check out our latest analysis for Hanshang Group

The Power Of Non-Operating Revenue

At most companies, some revenue streams, such as government grants, are accounted for as non-operating revenue, while the core business is said to produce operating revenue. Generally speaking, operating revenue is a more reliable guide to the sustainable revenue generating capacity of the business. However, we note that when non-operating revenue increases suddenly, it will sometimes generate an unsustainable boost to profit. Notably, Hanshang Group had a significant increase in non-operating revenue over the last year. In fact, our data indicates that non-operating revenue increased from -CN¥55.2m to CN¥11.4m. If that non-operating revenue fails to manifest in the current year, then there's a real risk the bottom line profit result will be impacted negatively. In order to better understand a company's profit result, it can sometimes help to consider whether the result would be very different without a sudden increase in non-operating revenue.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Hanshang Group.

How Do Unusual Items Influence Profit?

As well as that spike in non-operating revenue, we should also consider the CN¥7.9m boost to profit coming from unusual items, over the last year. While we like to see profit increases, we tend to be a little more cautious when unusual items have made a big contribution. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. Which is hardly surprising, given the name. If Hanshang Group doesn't see that contribution repeat, then all else being equal we'd expect its profit to drop over the current year.

Our Take On Hanshang Group's Profit Performance

In the last year Hanshang Group's non-operating revenue really gave it a boost, but not in a way that is necessarily going to be sustained. And on top of that, it also saw an unusual item boost its profit, suggesting that next year might see a lower profit number, if these events are not repeated and everything else is equal. Considering all this we'd argue Hanshang Group's profits probably give an overly generous impression of its sustainable level of profitability. If you'd like to know more about Hanshang Group as a business, it's important to be aware of any risks it's facing. Case in point: We've spotted 3 warning signs for Hanshang Group you should be mindful of and 1 of these is concerning.

In this article we've looked at a number of factors that can impair the utility of profit numbers, and we've come away cautious. 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 with high insider ownership.

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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.