We Think Chinese Estates Holdings' (HKG:127) Statutory Profit Might Understate Its Earnings Potential

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 Chinese Estates Holdings' (HKG:127) statutory profits are a good guide to its underlying earnings.

It's good to see that over the last twelve months Chinese Estates Holdings made a profit of HK$731.2m on revenue of HK$586.8m. Below, you can see that both its revenue and its profit have fallen over the last three years.

View our latest analysis for Chinese Estates 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 Chinese Estates 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 Chinese Estates Holdings.

How Do Unusual Items Influence Profit?

Importantly, our data indicates that Chinese Estates Holdings' profit was reduced by HK$1.1b, 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. We looked at thousands of listed companies and found that unusual items are very often one-off in nature. And that's hardly a surprise given these line items are considered unusual. Chinese Estates Holdings took a rather significant hit from unusual items in the year to June 2020. As a result, we can surmise that the unusual items made its statutory profit significantly weaker than it would otherwise be.

Our Take On Chinese Estates Holdings' Profit Performance

As we discussed above, we think the significant unusual expense will make Chinese Estates Holdings' statutory profit lower than it would otherwise have been. Based on this observation, we consider it possible that Chinese Estates Holdings' statutory profit actually understates its earnings potential! On the other hand, its EPS actually shrunk in the last twelve months. At the end of the day, it's essential to consider more than just the factors above, if you want to understand the company properly. So while earnings quality is important, it's equally important to consider the risks facing Chinese Estates Holdings at this point in time. When we did our research, we found 3 warning signs for Chinese Estates Holdings (1 doesn't sit too well with us!) that we believe deserve your full attention.

This note has only looked at a single factor that sheds light on the nature of Chinese Estates Holdings' profit. But there are plenty of other ways to inform your opinion of a company. 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. 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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