The Strong Earnings Posted By Wai Yuen Tong Medicine Holdings (HKG:897) Are A Good Indication Of The Strength Of The Business

Even though Wai Yuen Tong Medicine Holdings Limited's (HKG:897) recent earnings release was robust, the market didn't seem to notice. Investors are probably missing some underlying factors which are encouraging for the future of the company.

See our latest analysis for Wai Yuen Tong Medicine Holdings

The Impact Of Unusual Items On Profit

For anyone who wants to understand Wai Yuen Tong Medicine Holdings' profit beyond the statutory numbers, it's important to note that during the last twelve months statutory profit was reduced by HK$32m due to unusual items. While deductions due to unusual items are disappointing in the first instance, there is a silver lining. We looked at thousands of listed companies and found that unusual items are very often one-off in nature. And, after all, that's exactly what the accounting terminology implies. Assuming those unusual expenses don't come up again, we'd therefore expect Wai Yuen Tong Medicine Holdings to produce a higher profit next year, all else being equal.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Wai Yuen Tong Medicine Holdings.

An Unusual Tax Situation

Just as we noted the unusual items, we must inform you that Wai Yuen Tong Medicine Holdings received a tax benefit which contributed HK$15m to the bottom line. This is of course a bit out of the ordinary, given it is more common for companies to be paying tax than receiving tax benefits! We're sure the company was pleased with its tax benefit. And since it previously lost money, it may well simply indicate the realisation of past tax losses. However, our data indicates that tax benefits can temporarily boost statutory profit in the year it is booked, but subsequently profit may fall back. In the likely event the tax benefit is not repeated, we'd expect to see its statutory profit levels drop, at least in the absence of strong growth.

Our Take On Wai Yuen Tong Medicine Holdings' Profit Performance

In its last report Wai Yuen Tong Medicine Holdings received a tax benefit which might make its profit look better than it really is on a underlying level. But on the other hand, it also saw an unusual item depress its profit. Considering the aforementioned, we think that Wai Yuen Tong Medicine Holdings' profits are probably a reasonable reflection of its underlying profitability; although we'd be confident in that conclusion if we saw a cleaner set of results. If you'd like to know more about Wai Yuen Tong Medicine Holdings as a business, it's important to be aware of any risks it's facing. For example - Wai Yuen Tong Medicine Holdings has 2 warning signs we think you should be aware of.

In this article we've looked at a number of factors that can impair the utility of profit numbers, as a guide to a business. 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. 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.