Grand Ocean Advanced Resources (HKG:65) Is Posting Healthy Earnings, But It Is Not All Good News

We didn't see Grand Ocean Advanced Resources Company Limited's (HKG:65) stock surge when it reported robust earnings recently. We think that investors might be worried about the foundations the earnings are built on.

Check out our latest analysis for Grand Ocean Advanced Resources

The Impact Of Unusual Items On Profit

For anyone who wants to understand Grand Ocean Advanced Resources' profit beyond the statutory numbers, it's important to note that during the last twelve months statutory profit gained from HK$27m worth of unusual items. While it's always nice to have higher profit, a large contribution from unusual items sometimes dampens our enthusiasm. We ran the numbers on most publicly listed companies worldwide, and it's very common for unusual items to be once-off in nature. Which is hardly surprising, given the name. We can see that Grand Ocean Advanced Resources' positive unusual items were quite significant relative to its profit in the year to December 2021. As a result, we can surmise that the unusual items are making its statutory profit significantly stronger than it would otherwise be.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Grand Ocean Advanced Resources.

An Unusual Tax Situation

Just as we noted the unusual items, we must inform you that Grand Ocean Advanced Resources received a tax benefit which contributed HK$385k 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. And since it previously lost money, it may well simply indicate the realisation of past tax losses. 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 Grand Ocean Advanced Resources' Profit Performance

In the last year Grand Ocean Advanced Resources received a tax benefit, which boosted its profit in a way that might not be much more sustainable than turning prime farmland into gas fields. And on top of that, it also saw an unusual item boost its profit, suggesting that next year might see a lower profit number, if these events are not repeated. Considering all this we'd argue Grand Ocean Advanced Resources' profits probably give an overly generous impression of its sustainable level of profitability. If you want to do dive deeper into Grand Ocean Advanced Resources, you'd also look into what risks it is currently facing. You'd be interested to know, that we found 3 warning signs for Grand Ocean Advanced Resources and you'll want to know about them.

Our examination of Grand Ocean Advanced Resources has focussed on certain factors that can make its earnings look better than they are. And, on that basis, we are somewhat skeptical. 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.