We Wouldn't Rely On Carpenter Tan Holdings's (HKG:837) Statutory Earnings As A Guide

Broadly speaking, profitable businesses are less risky than 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. This article will consider whether Carpenter Tan Holdings' (HKG:837) statutory profits are a good guide to its underlying earnings.

We like the fact that Carpenter Tan Holdings made a profit of CN¥76.2m on its revenue of CN¥274.3m, in the last year. Below, you can see that both its revenue and its profit have fallen over the last three years.

Check out our latest analysis for Carpenter Tan Holdings

Importantly, statutory profits are not always the best tool for understanding a company's true earnings power, so it's well worth examining profits in a little more detail. This article will focus on the impact unusual items have had on Carpenter Tan Holdings' statutory earnings. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Carpenter Tan Holdings.

The Impact Of Unusual Items On Profit

For anyone who wants to understand Carpenter Tan Holdings' profit beyond the statutory numbers, it's important to note that during the last twelve months statutory profit gained from CN¥20m worth of 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. 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'. If Carpenter Tan Holdings doesn't see that contribution repeat, then all else being equal we'd expect its profit to drop over the current year.

Our Take On Carpenter Tan Holdings' Profit Performance

We'd posit that Carpenter Tan Holdings' statutory earnings aren't a clean read on ongoing productivity, due to the large unusual item. Because of this, we think that it may be that Carpenter Tan Holdings' statutory profits are better than its underlying earnings power. In further bad news, its earnings per share decreased in the last year. 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. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. For example, Carpenter Tan Holdings has 3 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.

This note has only looked at a single factor that sheds light on the nature of Carpenter Tan Holdings' profit. But there is always more to discover if you are capable of focussing your mind on minutiae. 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. 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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