Are China XLX Fertiliser's (HKG:1866) Statutory Earnings A Good Reflection Of Its Earnings Potential?

It might be old fashioned, but we really like to invest in companies that make a profit, each and every year. 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. This article will consider whether China XLX Fertiliser's (HKG:1866) statutory profits are a good guide to its underlying earnings.

It's good to see that over the last twelve months China XLX Fertiliser made a profit of CN¥245.0m on revenue of CN¥9.07b. In the chart below, you can see that its profit and revenue have both grown over the last three years, albeit not in the last year.

View our latest analysis for China XLX Fertiliser

Of course, when it comes to statutory profit, the devil is often in the detail, and we can get a better sense for a company by diving deeper into the financial statements. This article will focus on the impact unusual items have had on China XLX Fertiliser's statutory earnings. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of China XLX Fertiliser.

How Do Unusual Items Influence Profit?

For anyone who wants to understand China XLX Fertiliser's profit beyond the statutory numbers, it's important to note that during the last twelve months statutory profit gained from CN¥74m worth of 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. Which is hardly surprising, given the name. If China XLX Fertiliser doesn't see that contribution repeat, then all else being equal we'd expect its profit to drop over the current year.

Our Take On China XLX Fertiliser's Profit Performance

We'd posit that China XLX Fertiliser's statutory earnings aren't a clean read on ongoing productivity, due to the large unusual item. Because of this, we think that it may be that China XLX Fertiliser's statutory profits are better than its underlying earnings power. But the good news is that its EPS growth over the last three years has been very impressive. 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. So if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. For example, we've found that China XLX Fertiliser has 3 warning signs (1 doesn't sit too well with us!) that deserve your attention before going any further with your analysis.

Today we've zoomed in on a single data point to better understand the nature of China XLX Fertiliser'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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