We Think That There Are More Issues For Hainan Airport Infrastructure (SHSE:600515) Than Just Sluggish Earnings

The market wasn't impressed with the soft earnings from Hainan Airport Infrastructure Co., Ltd (SHSE:600515) recently. Our analysis has found some reasons to be concerned, beyond the weak headline numbers.

See our latest analysis for Hainan Airport Infrastructure

The Power Of Non-Operating Revenue

Companies will classify their revenue streams as either operating revenue or other revenue. Oftentimes, non-operating revenue spikes are not repeated, so it makes sense to be cautious where non-operating revenue has made a very large contribution to total profit. However, we note that when non-operating revenue increases suddenly, it will sometimes generate an unsustainable boost to profit. It's worth noting that Hainan Airport Infrastructure saw a big increase in non-operating revenue over the last year. Indeed, its non-operating revenue rose from CN¥570.5m last year to CN¥787.9m this year. The high levels of non-operating revenue are problematic because if (and when) they do not repeat, then overall revenue (and profitability) of the firm will fall. Sometimes, you can get a better idea of the underlying earnings potential of a company by excluding unusual boosts to non-operating revenue.

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

Alongside that spike in non-operating revenue, it's also important to note that Hainan Airport Infrastructure'sprofit was boosted by unusual items worth CN¥169m in the last twelve months. 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. If Hainan Airport Infrastructure 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 Hainan Airport Infrastructure's Profit Performance

In the last year Hainan Airport Infrastructure'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. For the reasons mentioned above, we think that a perfunctory glance at Hainan Airport Infrastructure's statutory profits might make it look better than it really is on an underlying level. If you'd like to know more about Hainan Airport Infrastructure as a business, it's important to be aware of any risks it's facing. Our analysis shows 3 warning signs for Hainan Airport Infrastructure (1 makes us a bit uncomfortable!) and we strongly recommend you look at them before investing.

Our examination of Hainan Airport Infrastructure has focussed on certain factors that can make its earnings look better than they are. And, on that basis, we are somewhat skeptical. 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 with significant insider holdings 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.