Robust Earnings May Not Tell The Whole Story For Tibet Water Resources (HKG:1115)

The recent earnings posted by Tibet Water Resources Ltd. (HKG:1115) were solid, but the stock didn't move as much as we expected. However the statutory profit number doesn't tell the whole story, and we have found some factors which might be of concern to shareholders.

See our latest analysis for Tibet Water Resources

The Impact Of Unusual Items On Profit

For anyone who wants to understand Tibet Water Resources' profit beyond the statutory numbers, it's important to note that during the last twelve months statutory profit gained from CN¥29m 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 crunched the numbers on thousands of publicly listed companies, we found that a boost from unusual items in a given year is often not repeated the next year. And that's as you'd expect, given these boosts are described as 'unusual'. Tibet Water Resources had a rather significant contribution from unusual items relative to its profit to December 2020. All else being equal, this would likely have the effect of making the statutory profit a poor guide to underlying earnings power.

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

Our Take On Tibet Water Resources' Profit Performance

As previously mentioned, Tibet Water Resources' large boost from unusual items won't be there indefinitely, so its statutory earnings are probably a poor guide to its underlying profitability. For this reason, we think that Tibet Water Resources' statutory profits may be a bad guide to its underlying earnings power, and might give investors an overly positive impression of the company. On the bright side, the company showed enough improvement to book a profit this year, after losing money 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. Case in point: We've spotted 3 warning signs for Tibet Water Resources you should be mindful of and 1 of them is concerning.

Today we've zoomed in on a single data point to better understand the nature of Tibet Water Resources' profit. 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.

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