We Think Dongfeng Motor Group's (HKG:489) Statutory Profit Might Understate Its Earnings Potential

Many investors consider it preferable to invest in profitable companies over unprofitable ones, because profitability suggests a business is sustainable. 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. This article will consider whether Dongfeng Motor Group's (HKG:489) statutory profits are a good guide to its underlying earnings.

While Dongfeng Motor Group was able to generate revenue of CN¥103.2b in the last twelve months, we think its profit result of CN¥7.38b was more important. In the last few years both its revenue and its profit have fallen, as you can see in the chart below.

See our latest analysis for Dongfeng Motor Group

Not all profits are equal, and we can learn more about the nature of a company's past profitability by diving deeper into the financial statements. This article will discuss how unusual items have impacted Dongfeng Motor Group's most recent profit results. 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

Importantly, our data indicates that Dongfeng Motor Group's profit was reduced by CN¥2.8b, due to unusual items, over the last year. It's never great to see unusual items costing the company profits, but on the upside, things might improve sooner rather than later. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. And, after all, that's exactly what the accounting terminology implies. Dongfeng Motor Group 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 Dongfeng Motor Group's Profit Performance

As we mentioned previously, the Dongfeng Motor Group's profit was hampered by unusual items in the last year. Because of this, we think Dongfeng Motor Group's 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. At the end of the day, it's essential to consider more than just the factors above, if you want to understand the company properly. If you want to do dive deeper into Dongfeng Motor Group, you'd also look into what risks it is currently facing. For instance, we've identified 5 warning signs for Dongfeng Motor Group (1 can't be ignored) you should be familiar with.

This note has only looked at a single factor that sheds light on the nature of Dongfeng Motor Group's 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. 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. 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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