Here's Why We Think Qingling Motors' (HKG:1122) Statutory Earnings Might Be Conservative

Many investors consider it preferable to invest in profitable companies over unprofitable ones, because profitability suggests a business is sustainable. Having said that, sometimes statutory profit levels are not a good guide to ongoing profitability, because some short term one-off factor has impacted profit levels. In this article, we'll look at how useful this year's statutory profit is, when analysing Qingling Motors (HKG:1122).

It's good to see that over the last twelve months Qingling Motors made a profit of CN¥227.3m on revenue of CN¥4.56b. As you can see below, its profit has actually declined over the last three years, even though its revenue was flat.

See our latest analysis for Qingling Motors

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 focus on the impact unusual items have had on Qingling Motors' statutory earnings. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Qingling Motors.

How Do Unusual Items Influence Profit?

To properly understand Qingling Motors' profit results, we need to consider the CN¥58m expense attributed to unusual items. It's never great to see unusual items costing the company profits, but on the upside, things might improve sooner rather than later. We looked at thousands of listed companies and found that unusual items are very often one-off in nature. And that's hardly a surprise given these line items are considered unusual. Qingling Motors took a rather significant hit from unusual items in the year to June 2020. All else being equal, this would likely have the effect of making the statutory profit look worse than its underlying earnings power.

Our Take On Qingling Motors' Profit Performance

As we discussed above, we think the significant unusual expense will make Qingling Motors' statutory profit lower than it would otherwise have been. Because of this, we think Qingling Motors' underlying earnings potential is as good as, or possibly even better, than the statutory profit makes it seem! On the other hand, its EPS actually shrunk in 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. If you'd like to know more about Qingling Motors as a business, it's important to be aware of any risks it's facing. When we did our research, we found 3 warning signs for Qingling Motors (1 is significant!) that we believe deserve your full attention.

Today we've zoomed in on a single data point to better understand the nature of Qingling Motors' 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. 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.

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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. 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.
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