China National Building Material's (HKG:3323) Profits May Not Reveal Underlying Issues

Following the solid earnings report from China National Building Material Company Limited (HKG:3323), the market responded by bidding up the stock price. Despite this, our analysis suggests that there are some factors weakening the foundations of those good profit numbers.

This technology could replace computers: discover the 20 stocks are working to make quantum computing a reality.

The Impact Of Unusual Items On Profit

For anyone who wants to understand China National Building Material's profit beyond the statutory numbers, it's important to note that during the last twelve months statutory profit gained from CN¥2.1b worth of unusual items. While it's always nice to have higher profit, a large contribution from unusual items sometimes dampens our enthusiasm. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. Which is hardly surprising, given the name. Assuming those unusual items don't show up again in the current year, we'd thus expect profit to be weaker next year (in the absence of business growth, that is).

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.

Our Take On China National Building Material's Profit Performance

Arguably, China National Building Material's statutory earnings have been distorted by unusual items boosting profit. Because of this, we think that it may be that China National Building Material's statutory profits are better than its underlying earnings power. But the happy news is that, while acknowledging we have to look beyond the statutory numbers, those numbers are still improving, with EPS growing at a very high rate over the last year. 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 China National Building Material at this point in time. To that end, you should learn about the 2 warning signs we've spotted with China National Building Material (including 1 which is a bit unpleasant).

This note has only looked at a single factor that sheds light on the nature of China National Building Material'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. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks with high insider ownership.

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.