We're Not So Sure You Should Rely on China Rare Earth Holdings's (HKG:769) 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. This article will consider whether China Rare Earth Holdings' (HKG:769) statutory profits are a good guide to its underlying earnings.

While China Rare Earth Holdings was able to generate revenue of HK$1.04b in the last twelve months, we think its profit result of HK$35.6m was more important. The good news is that the company managed to grow its revenue over the last three years, and also move from loss-making to profitable.

View our latest analysis for China Rare Earth Holdings

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 China Rare Earth Holdings' most recent profit results. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of China Rare Earth Holdings.

The Impact Of Unusual Items On Profit

To properly understand China Rare Earth Holdings' profit results, we need to consider the HK$11m gain attributed to unusual items. While it's always nice to have higher profit, a large contribution from unusual items sometimes dampens our enthusiasm. 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. China Rare Earth Holdings 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 China Rare Earth Holdings' Profit Performance

As we discussed above, we think the significant positive unusual item makes China Rare Earth Holdings'earnings a poor guide to its underlying profitability. As a result, we think it may well be the case that China Rare Earth Holdings' underlying earnings power is lower than its statutory profit. The good news is that, its earnings per share increased by 78% in 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. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. For example - China Rare Earth Holdings has 1 warning sign we think you should be aware of.

Today we've zoomed in on a single data point to better understand the nature of China Rare Earth Holdings' 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 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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