Chu Kong Petroleum and Natural Gas Steel Pipe Holdings' (HKG:1938) Solid Earnings May Rest On Weak Foundations

The market for Chu Kong Petroleum and Natural Gas Steel Pipe Holdings Limited's (HKG:1938) stock was strong after it released a healthy earnings report last week. However, we think that shareholders should be cautious as we found some worrying factors underlying the profit.

See our latest analysis for Chu Kong Petroleum and Natural Gas Steel Pipe Holdings

The Impact Of Unusual Items On Profit

For anyone who wants to understand Chu Kong Petroleum and Natural Gas Steel Pipe Holdings' profit beyond the statutory numbers, it's important to note that during the last twelve months statutory profit was reduced by CN¥5.4m due to unusual items. 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. If Chu Kong Petroleum and Natural Gas Steel Pipe Holdings doesn't see those unusual expenses repeat, then all else being equal we'd expect its profit to increase over the coming year.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Chu Kong Petroleum and Natural Gas Steel Pipe Holdings.

An Unusual Tax Situation

Just as we noted the unusual items, we must inform you that Chu Kong Petroleum and Natural Gas Steel Pipe Holdings received a tax benefit which contributed CN¥145m to the bottom line. This is of course a bit out of the ordinary, given it is more common for companies to be paying tax than receiving tax benefits! We're sure the company was pleased with its 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. Assuming the tax benefit is not repeated every year, we could see its profitability drop noticeably, all else being equal. 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 Chu Kong Petroleum and Natural Gas Steel Pipe Holdings' Profit Performance

In its last report Chu Kong Petroleum and Natural Gas Steel Pipe Holdings received a tax benefit which might make its profit look better than it really is on a underlying level. Having said that, it also had a unusual item reducing its profit. Based on these factors, we think it's very unlikely that Chu Kong Petroleum and Natural Gas Steel Pipe Holdings' statutory profits make it seem much weaker than it is. In light of this, if you'd like to do more analysis on the company, it's vital to be informed of the risks involved. To help with this, we've discovered 2 warning signs (1 shouldn't be ignored!) that you ought to be aware of before buying any shares in Chu Kong Petroleum and Natural Gas Steel Pipe Holdings.

In this article we've looked at a number of factors that can impair the utility of profit numbers, as a guide to a business. 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. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.