We Believe Huasheng International Holding's (HKG:1323) Earnings Are A Poor Guide For Its Profitability

Strong earnings weren't enough to please Huasheng International Holding Limited's (HKG:1323) shareholders over the last week. Our analysis found several concerning factors in the earnings report beyond the strong statutory profit number.

See our latest analysis for Huasheng International Holding

Operating Revenue Or Not?

Most companies divide classify their revenue as either 'operating revenue', which comes from normal operations, and other revenue, which could include government grants, for example. Where possible, we prefer rely on operating revenue to get a better understanding of how the business is functioning. Importantly, the non-operating revenue often comes without associated ongoing costs, so it can boost profit by letting it fall straight to the bottom line, making the operating business seem better than it really is. It's worth noting that Huasheng International Holding saw a big increase in non-operating revenue over the last year. Indeed, its non-operating revenue rose from HK$213.5m last year to HK$919.3m 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.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Huasheng International Holding.

The Impact Of Unusual Items On Profit

As well as that spike in non-operating revenue, we should also consider the HK$16m 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. We can see that Huasheng International Holding's positive unusual items were quite significant relative to its profit in the year to September 2021. All else being equal, this would likely have the effect of making the statutory profit a poor guide to underlying earnings power.

Our Take On Huasheng International Holding's Profit Performance

In its last report Huasheng International Holding benefitted from a spike in non-operating revenue which may have boosted its profit in a way that may be no more sustainable than low quality coal mining. Furthermore, unusual items also made a nice positive contribution to its profit, which may well drop next year (all else being equal) if these phenomena are not repeated. For the reasons mentioned above, we think that a perfunctory glance at Huasheng International Holding's statutory profits might make it look better than it really is on an underlying level. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. While conducting our analysis, we found that Huasheng International Holding has 2 warning signs and it would be unwise to ignore them.

Our examination of Huasheng International Holding 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. 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. 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.