Future Bright Holdings' (HKG:703) Promising Earnings May Rest On Soft Foundations

Investors were disappointed with Future Bright Holdings Limited's (HKG:703) earnings, despite the strong profit numbers. We think that the market might be paying attention to some underlying factors that they find to be concerning.

See our latest analysis for Future Bright Holdings

The Impact Of Unusual Items On Profit

For anyone who wants to understand Future Bright Holdings' profit beyond the statutory numbers, it's important to note that during the last twelve months statutory profit gained from HK$9.0m 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. 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'. If Future Bright Holdings doesn't see that contribution repeat, then all else being equal we'd expect its profit to drop over the current year.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Future Bright Holdings.

An Unusual Tax Situation

Just as we noted the unusual items, we must inform you that Future Bright Holdings received a tax benefit which contributed HK$5.6m to the bottom line. This is meaningful because companies usually pay tax rather than receive tax benefits. Of course, prima facie it's great to receive a tax benefit. 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 Future Bright Holdings' Profit Performance

In its last report Future Bright Holdings received a tax benefit which might make its profit look better than it really is on a underlying level. Furthermore, it also benefitted from a positive unusual item, which boosted the profit result even higher. For the reasons mentioned above, we think that a perfunctory glance at Future Bright Holdings' statutory profits might make it look better than it really is on an underlying level. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. Be aware that Future Bright Holdings is showing 3 warning signs in our investment analysis and 1 of those doesn't sit too well with us...

In this article we've looked at a number of factors that can impair the utility of profit numbers, and we've come away cautious. 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 with significant insider holdings to be useful.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.