Here's Why We Don't Think First Tractor's (HKG:38) Statutory Earnings Reflect Its Underlying Earnings Potential

Statistically speaking, it is less risky to invest in profitable companies than in unprofitable ones. 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 First Tractor (HKG:38).

We like the fact that First Tractor made a profit of CN¥469.0m on its revenue of CN¥7.10b, in the last year.

Check out our latest analysis for First Tractor

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 First Tractor's statutory earnings. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of First Tractor.

How Do Unusual Items Influence Profit?

To properly understand First Tractor's profit results, we need to consider the CN¥148m gain attributed to unusual items. 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. And that's as you'd expect, given these boosts are described as 'unusual'. We can see that First Tractor'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 First Tractor's Profit Performance

As we discussed above, we think the significant positive unusual item makes First Tractor'searnings a poor guide to its underlying profitability. As a result, we think it may well be the case that First Tractor's underlying earnings power is lower than its statutory profit. The good news is that it earned a profit in the last twelve months, despite its previous loss. 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'd like to know more about First Tractor as a business, it's important to be aware of any risks it's facing. Every company has risks, and we've spotted 1 warning sign for First Tractor you should know about.

This note has only looked at a single factor that sheds light on the nature of First Tractor'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. 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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