Impressive Earnings May Not Tell The Whole Story For Chu Kong Petroleum and Natural Gas Steel Pipe Holdings (HKG:1938)

Chu Kong Petroleum and Natural Gas Steel Pipe Holdings Limited (HKG:1938) announced strong profits, but the stock was stagnant. Our analysis suggests that this might be because shareholders have noticed some concerning underlying factors.

Our free stock report includes 2 warning signs investors should be aware of before investing in Chu Kong Petroleum and Natural Gas Steel Pipe Holdings. Read for free now.

The Impact Of Unusual Items On Profit

Importantly, our data indicates that Chu Kong Petroleum and Natural Gas Steel Pipe Holdings' profit was reduced by CN¥18m, 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. We looked at thousands of listed companies and found that unusual items are very often one-off in nature. And, after all, that's exactly what the accounting terminology implies. Assuming those unusual expenses don't come up again, we'd therefore expect Chu Kong Petroleum and Natural Gas Steel Pipe Holdings to produce a higher profit next year, all else being equal.

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¥46m 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. 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. If you'd like to know more about Chu Kong Petroleum and Natural Gas Steel Pipe Holdings as a business, it's important to be aware of any risks it's facing. Case in point: We've spotted 2 warning signs for Chu Kong Petroleum and Natural Gas Steel Pipe Holdings you should be mindful of and 1 of them is a bit concerning.

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. 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 with high insider ownership.

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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.