We're Not So Sure You Should Rely on Shenguan Holdings (Group)'s (HKG:829) Statutory Earnings

Many investors consider it preferable to invest in profitable companies over unprofitable ones, because profitability suggests a business is sustainable. However, sometimes companies receive a one-off boost (or reduction) to their profit, and it's not always clear whether statutory profits are a good guide, going forward. Today we'll focus on whether this year's statutory profits are a good guide to understanding Shenguan Holdings (Group) (HKG:829).

While Shenguan Holdings (Group) was able to generate revenue of CN¥974.8m in the last twelve months, we think its profit result of CN¥71.2m was more important. The chart below shows that revenue has been flat over the last three years, while profit has actually declined.

View our latest analysis for Shenguan Holdings (Group)

Importantly, statutory profits are not always the best tool for understanding a company's true earnings power, so it's well worth examining profits in a little more detail. This article will focus on the impact unusual items have had on Shenguan Holdings (Group)'s statutory earnings. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Shenguan Holdings (Group).

How Do Unusual Items Influence Profit?

To properly understand Shenguan Holdings (Group)'s profit results, we need to consider the CN¥4.8m gain attributed to unusual items. We can't deny that higher profits generally leave us optimistic, but we'd prefer it if the profit were to be sustainable. We ran the numbers on most publicly listed companies worldwide, and it's very common for unusual items to be once-off in nature. And, after all, that's exactly what the accounting terminology implies. Shenguan Holdings (Group) had a rather significant contribution from unusual items relative to its profit to June 2020. All else being equal, this would likely have the effect of making the statutory profit a poor guide to underlying earnings power.

Our Take On Shenguan Holdings (Group)'s Profit Performance

As previously mentioned, Shenguan Holdings (Group)'s large boost from unusual items won't be there indefinitely, so its statutory earnings are probably a poor guide to its underlying profitability. As a result, we think it may well be the case that Shenguan Holdings (Group)'s underlying earnings power is lower than its statutory profit. In further bad news, its earnings per share decreased in the last year. Of course, we've only just scratched the surface when it comes to analysing its earnings; one could also consider margins, forecast growth, and return on investment, among other factors. If you want to do dive deeper into Shenguan Holdings (Group), you'd also look into what risks it is currently facing. To help with this, we've discovered 3 warning signs (1 is a bit concerning!) that you ought to be aware of before buying any shares in Shenguan Holdings (Group).

This note has only looked at a single factor that sheds light on the nature of Shenguan Holdings (Group)'s profit. But there is always more to discover if you are capable of focussing your mind on minutiae. 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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This article by Simply Wall St is general in nature. 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.
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