Hong Kong Shanghai Alliance Holdings' (HKG:1001) Earnings Offer More Than Meets The Eye

Hong Kong Shanghai Alliance Holdings Limited's (HKG:1001) recent earnings report didn't offer any surprises, with the shares unchanged over the last week. We did some digging, and we think that investors are missing some encouraging factors in the underlying numbers.

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The Impact Of Unusual Items On Profit

For anyone who wants to understand Hong Kong Shanghai Alliance Holdings' profit beyond the statutory numbers, it's important to note that during the last twelve months statutory profit was reduced by HK$26m due to unusual items. While deductions due to unusual items are disappointing in the first instance, there is a silver lining. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. And that's hardly a surprise given these line items are considered unusual. Assuming those unusual expenses don't come up again, we'd therefore expect Hong Kong Shanghai Alliance Holdings to produce a higher profit next year, all else being equal.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Hong Kong Shanghai Alliance Holdings.

An Unusual Tax Situation

Just as we noted the unusual items, we must inform you that Hong Kong Shanghai Alliance Holdings received a tax benefit which contributed HK$16m to the bottom line. This is of course a bit out of the ordinary, given it is more common for companies to be paying tax than receiving tax benefits! Of course, prima facie it's great to receive a tax benefit. However, the devil in the detail is that these kind of benefits only impact in the year they are booked, and are often one-off in nature. Assuming the tax benefit is not repeated every year, we could see its profitability drop noticeably, all else being equal.

Our Take On Hong Kong Shanghai Alliance Holdings' Profit Performance

In its last report Hong Kong Shanghai Alliance Holdings received a tax benefit which might make its profit look better than it really is on a underlying level. Having said that, it also had a unusual item reducing its profit. Given the contrasting considerations, we don't have a strong view as to whether Hong Kong Shanghai Alliance Holdings's profits are an apt reflection of its underlying potential for profit. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. To help with this, we've discovered 4 warning signs (1 is significant!) that you ought to be aware of before buying any shares in Hong Kong Shanghai Alliance Holdings.

In this article we've looked at a number of factors that can impair the utility of profit numbers, as a guide to a business. 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 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.