Should You Use Wenzhou Kangning Hospital's (HKG:2120) Statutory Earnings To Analyse It?

Broadly speaking, profitable businesses are less risky than unprofitable ones. That said, the current statutory profit is not always a good guide to a company's underlying profitability. This article will consider whether Wenzhou Kangning Hospital's (HKG:2120) statutory profits are a good guide to its underlying earnings.

We like the fact that Wenzhou Kangning Hospital made a profit of CN¥41.6m on its revenue of CN¥946.9m, in the last year. As you can see in the chart below, its profit has declined over the last three years, even though its revenue has increased.

See our latest analysis for Wenzhou Kangning Hospital

Of course, it is only sensible to look beyond the statutory profits and question how well those numbers represent the sustainable earnings power of the business. This article will discuss how unusual items have impacted Wenzhou Kangning Hospital's most recent profit results. That might leave you wondering what analysts are forecasting in terms of future profitability. Luckily, you can click here to see an interactive graph depicting future profitability, based on their estimates.

How Do Unusual Items Influence Profit?

For anyone who wants to understand Wenzhou Kangning Hospital's profit beyond the statutory numbers, it's important to note that during the last twelve months statutory profit was reduced by CN¥27m 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 Wenzhou Kangning Hospital doesn't see those unusual expenses repeat, then all else being equal we'd expect its profit to increase over the coming year.

Our Take On Wenzhou Kangning Hospital's Profit Performance

Because unusual items detracted from Wenzhou Kangning Hospital's earnings over the last year, you could argue that we can expect an improved result in the current quarter. Based on this observation, we consider it likely that Wenzhou Kangning Hospital's statutory profit actually understates its earnings potential! On the other hand, its EPS actually shrunk in the last twelve months. The goal of this article has been to assess how well we can rely on the statutory earnings to reflect the company's potential, but there is plenty more to consider. So while earnings quality is important, it's equally important to consider the risks facing Wenzhou Kangning Hospital at this point in time. You'd be interested to know, that we found 3 warning signs for Wenzhou Kangning Hospital and you'll want to know about these.

This note has only looked at a single factor that sheds light on the nature of Wenzhou Kangning Hospital's profit. But there is always more to discover if you are capable of focussing your mind on minutiae. 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 that insiders are buying.

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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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