Shareholders Can Be Confident That Cheuk Nang (Holdings)'s (HKG:131) Earnings Are High Quality

Cheuk Nang (Holdings) Limited's (HKG:131) robust earnings report didn't manage to move the market for its stock. Our analysis suggests that shareholders have noticed something concerning in the numbers.

Check out our latest analysis for Cheuk Nang (Holdings)

The Impact Of Unusual Items On Profit

Importantly, our data indicates that Cheuk Nang (Holdings)'s profit was reduced by HK$153m, due to unusual items, over the last year. While deductions due to unusual items are disappointing in the first instance, there is a silver lining. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. And, after all, that's exactly what the accounting terminology implies. In the twelve months to June 2024, Cheuk Nang (Holdings) had a big unusual items expense. All else being equal, this would likely have the effect of making the statutory profit look worse than its underlying earnings power.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Cheuk Nang (Holdings).

An Unusual Tax Situation

Having already discussed the impact of the unusual items, we should also note that Cheuk Nang (Holdings) received a tax benefit of HK$306m. This is meaningful because companies usually pay tax rather than receive tax benefits. We're sure the company was pleased with its tax benefit. However, the devil in the detail is that these kind of benefits only impact in the year they are booked, and are often one-off in nature. Assuming the tax benefit is not repeated every year, we could see its profitability drop noticeably, all else being equal.

Our Take On Cheuk Nang (Holdings)'s Profit Performance

In the last year Cheuk Nang (Holdings) received a tax benefit, which boosted its profit in a way that might not be much more sustainable than turning prime farmland into gas fields. Having said that, it also had a unusual item reducing its profit. Given the contrasting considerations, we don't have a strong view as to whether Cheuk Nang (Holdings)'s profits are an apt reflection of its underlying potential for profit. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. For example, we've found that Cheuk Nang (Holdings) has 3 warning signs (1 is a bit unpleasant!) that deserve your attention before going any further with your analysis.

Our examination of Cheuk Nang (Holdings) has focussed on certain factors that can make its earnings look better than they are. 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 with significant insider holdings to be useful.

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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.