China Shuifa Singyes Energy Holdings' (HKG:750) Earnings Aren't As Good As They Appear

China Shuifa Singyes Energy Holdings Limited (HKG:750) recently released a strong earnings report, and the market responded by raising the share price. Despite the strong profit numbers, we believe that there are some deeper issues which investors should look into.

View our latest analysis for China Shuifa Singyes Energy Holdings

How Do Unusual Items Influence Profit?

To properly understand China Shuifa Singyes Energy Holdings' profit results, we need to consider the CN¥82m gain attributed to unusual items. While it's always nice to have higher profit, a large contribution from unusual items sometimes dampens our enthusiasm. We ran the numbers on most publicly listed companies worldwide, and it's very common for unusual items to be once-off in nature. And that's as you'd expect, given these boosts are described as 'unusual'. We can see that China Shuifa Singyes Energy Holdings' positive unusual items were quite significant relative to its profit in the year to December 2020. All else being equal, this would likely have the effect of making the statutory profit a poor guide to underlying earnings power.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of China Shuifa Singyes Energy Holdings.

An Unusual Tax Situation

Just as we noted the unusual items, we must inform you that China Shuifa Singyes Energy Holdings received a tax benefit which contributed CN¥118m to the bottom line. It's always a bit noteworthy when a company is paid by the tax man, rather than paying the tax man. Of course, prima facie it's great to receive a tax benefit. And given that it lost money last year, it seems possible that the benefit is evidence that it now expects to find value in its past tax losses. However, our data indicates that tax benefits can temporarily boost statutory profit in the year it is booked, but subsequently profit may fall back. In the likely event the tax benefit is not repeated, we'd expect to see its statutory profit levels drop, at least in the absence of strong growth. So while we think it's great to receive a tax benefit, it does tend to imply an increased risk that the statutory profit overstates the sustainable earnings power of the business.

Our Take On China Shuifa Singyes Energy Holdings' Profit Performance

In its last report China Shuifa Singyes Energy Holdings received a tax benefit which might make its profit look better than it really is on a underlying level. And on top of that, it also saw an unusual item boost its profit, suggesting that next year might see a lower profit number, if these events are not repeated. On reflection, the above-mentioned factors give us the strong impression that China Shuifa Singyes Energy Holdings'underlying earnings power is not as good as it might seem, based on the statutory profit numbers. If you want to do dive deeper into China Shuifa Singyes Energy Holdings, you'd also look into what risks it is currently facing. For instance, we've identified 5 warning signs for China Shuifa Singyes Energy Holdings (2 are significant) you should be familiar with.

Our examination of China Shuifa Singyes Energy Holdings 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 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 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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