Should You Rely On Shanghai Electric Group's (HKG:2727) Earnings Growth?

It might be old fashioned, but we really like to invest in companies that make a profit, each and every year. That said, the current statutory profit is not always a good guide to a company's underlying profitability. This article will consider whether Shanghai Electric Group's (HKG:2727) statutory profits are a good guide to its underlying earnings.

While Shanghai Electric Group was able to generate revenue of CN¥134.8b in the last twelve months, we think its profit result of CN¥3.63b was more important. In the chart below, you can see that its profit and revenue have both grown over the last three years.

Check out our latest analysis for Shanghai Electric Group

Of course, when it comes to statutory profit, the devil is often in the detail, and we can get a better sense for a company by diving deeper into the financial statements. This article will focus on the impact unusual items have had on Shanghai Electric Group's statutory earnings. 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.

How Do Unusual Items Influence Profit?

To properly understand Shanghai Electric Group's profit results, we need to consider the CN¥3.2b gain attributed to unusual items. We can't deny that higher profits generally leave us optimistic, but we'd prefer it if the profit were to be sustainable. 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 Shanghai Electric Group's positive unusual items were quite significant relative to its profit in the year to September 2020. 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 Shanghai Electric Group's Profit Performance

As we discussed above, we think the significant positive unusual item makes Shanghai Electric Group'searnings a poor guide to its underlying profitability. As a result, we think it may well be the case that Shanghai Electric Group's underlying earnings power is lower than its statutory profit. Nonetheless, it's still worth noting that its earnings per share have grown at 47% over the last three years. 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 Shanghai Electric Group, you'd also look into what risks it is currently facing. For example - Shanghai Electric Group has 2 warning signs we think you should be aware of.

This note has only looked at a single factor that sheds light on the nature of Shanghai Electric Group's profit. But there are plenty of other ways to inform your opinion of a company. 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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