Stock Analysis

We Believe Sinolink Worldwide Holdings' (HKG:1168) Earnings Are A Poor Guide For Its Profitability

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Despite posting strong earnings, Sinolink Worldwide Holdings Limited's (HKG:1168) stock didn't move much over the last week. We looked deeper into the numbers and found that shareholders might be concerned with some underlying weaknesses.

View our latest analysis for Sinolink Worldwide Holdings

SEHK:1168 Earnings and Revenue History September 22nd 2022

The Power Of Non-Operating Revenue

Most companies divide classify their revenue as either 'operating revenue', which comes from normal operations, and other revenue, which could include government grants, for example. Where possible, we prefer rely on operating revenue to get a better understanding of how the business is functioning. However, we note that when non-operating revenue increases suddenly, it will sometimes generate an unsustainable boost to profit. It's worth noting that Sinolink Worldwide Holdings saw a big increase in non-operating revenue over the last year. Indeed, its non-operating revenue rose from HK$26.3m last year to HK$104.2m this year. If that non-operating revenue fails to manifest in the current year, then there's a real risk the bottom line profit result will be impacted negatively. In order to better understand a company's profit result, it can sometimes help to consider whether the result would be very different without a sudden increase in non-operating revenue.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Sinolink Worldwide Holdings.

The Impact Of Unusual Items On Profit

As well as that spike in non-operating revenue, we should also consider the HK$549m boost to profit coming from unusual items, over the last year. 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 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. We can see that Sinolink Worldwide Holdings' positive unusual items were quite significant relative to its profit in the year to June 2022. As a result, we can surmise that the unusual items are making its statutory profit significantly stronger than it would otherwise be.

Our Take On Sinolink Worldwide Holdings' Profit Performance

In its last report Sinolink Worldwide Holdings benefitted from a spike in non-operating revenue which may have boosted its profit in a way that may be no more sustainable than low quality coal mining. And on top of that, it also saw an unusual item boost its profit, suggesting that next year might see a lower profit number, if these events are not repeated and everything else is equal. On reflection, the above-mentioned factors give us the strong impression that Sinolink Worldwide Holdings'underlying earnings power is not as good as it might seem, based on the statutory profit numbers. If you'd like to know more about Sinolink Worldwide Holdings as a business, it's important to be aware of any risks it's facing. While conducting our analysis, we found that Sinolink Worldwide Holdings has 1 warning sign and it would be unwise to ignore this.

Our examination of Sinolink Worldwide Holdings has focussed on certain factors that can make its earnings look better than they are. And, on that basis, we are somewhat skeptical. But there are plenty of other ways to inform your opinion of a company. 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.

Valuation is complex, but we're helping make it simple.

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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.