Are Shandong Xinhua Pharmaceutical's (HKG:719) Statutory Earnings A Good Guide To Its Underlying Profitability?

Broadly speaking, profitable businesses are less risky than unprofitable ones. Having said that, sometimes statutory profit levels are not a good guide to ongoing profitability, because some short term one-off factor has impacted profit levels. Today we'll focus on whether this year's statutory profits are a good guide to understanding Shandong Xinhua Pharmaceutical (HKG:719).

We like the fact that Shandong Xinhua Pharmaceutical made a profit of CN¥304.9m on its revenue of CN¥5.81b, in the last year. One positive is that it has grown both its profit and its revenue, over the last few years.

Check out our latest analysis for Shandong Xinhua Pharmaceutical

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 Shandong Xinhua Pharmaceutical's statutory earnings. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Shandong Xinhua Pharmaceutical.

The Impact Of Unusual Items On Profit

To properly understand Shandong Xinhua Pharmaceutical's profit results, we need to consider the CN¥68m 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. When we crunched the numbers on thousands of publicly listed companies, we found that a boost from unusual items in a given year is often not repeated the next year. And that's as you'd expect, given these boosts are described as 'unusual'. 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).

Our Take On Shandong Xinhua Pharmaceutical's Profit Performance

We'd posit that Shandong Xinhua Pharmaceutical's statutory earnings aren't a clean read on ongoing productivity, due to the large unusual item. Therefore, it seems possible to us that Shandong Xinhua Pharmaceutical's true underlying earnings power is actually less than its statutory profit. But at least holders can take some solace from the 43% per annum growth in EPS for the last three. 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 - Shandong Xinhua Pharmaceutical has 3 warning signs we think you should be aware of.

Today we've zoomed in on a single data point to better understand the nature of Shandong Xinhua Pharmaceutical'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. 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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