Does Beijing Enterprises Environment Group's (HKG:154) Statutory Profit Adequately Reflect Its Underlying Profit?

Many investors consider it preferable to invest in profitable companies over unprofitable ones, because profitability suggests a business is sustainable. However, sometimes companies receive a one-off boost (or reduction) to their profit, and it's not always clear whether statutory profits are a good guide, going forward. This article will consider whether Beijing Enterprises Environment Group's (HKG:154) statutory profits are a good guide to its underlying earnings.

It's good to see that over the last twelve months Beijing Enterprises Environment Group made a profit of HK$184.1m on revenue of HK$1.32b. In the chart below, you can see that its profit and revenue have both grown over the last three years, albeit not in the last year.

Check out our latest analysis for Beijing Enterprises Environment 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 discuss how unusual items have impacted Beijing Enterprises Environment Group's most recent profit results. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Beijing Enterprises Environment Group.

How Do Unusual Items Influence Profit?

Importantly, our data indicates that Beijing Enterprises Environment Group's profit was reduced by HK$114m, due to unusual items, over the last year. It's never great to see unusual items costing the company profits, but on the upside, things might improve sooner rather than later. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. And, after all, that's exactly what the accounting terminology implies. Assuming those unusual expenses don't come up again, we'd therefore expect Beijing Enterprises Environment Group to produce a higher profit next year, all else being equal.

Our Take On Beijing Enterprises Environment Group's Profit Performance

Unusual items (expenses) detracted from Beijing Enterprises Environment Group's earnings over the last year, but we might see an improvement next year. Based on this observation, we consider it likely that Beijing Enterprises Environment Group's statutory profit actually understates its earnings potential! And the EPS is up 68% annually, over the last three years. The goal of this article has been to assess how well we can rely on the statutory earnings to reflect the company's potential, but there is plenty more to consider. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. To help with this, we've discovered 3 warning signs (1 makes us a bit uncomfortable!) that you ought to be aware of before buying any shares in Beijing Enterprises Environment Group.

This note has only looked at a single factor that sheds light on the nature of Beijing Enterprises Environment 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. 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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