Here's Why We Don't Think China New City Commercial Development's (HKG:1321) Statutory Earnings Reflect Its Underlying Earnings Potential

Broadly speaking, profitable businesses are less risky than unprofitable ones. 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 China New City Commercial Development's (HKG:1321) statutory profits are a good guide to its underlying earnings.

We like the fact that China New City Commercial Development made a profit of CN¥116.4m on its revenue of CN¥1.60b, in the last year.

Check out our latest analysis for China New City Commercial Development

Not all profits are equal, and we can learn more about the nature of a company's past profitability by diving deeper into the financial statements. This article will focus on the impact unusual items have had on China New City Commercial Development's statutory earnings. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of China New City Commercial Development.

How Do Unusual Items Influence Profit?

Importantly, our data indicates that China New City Commercial Development's profit received a boost of CN¥253m in 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 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. Which is hardly surprising, given the name. China New City Commercial Development had a rather significant contribution from unusual items relative to its profit to June 2020. 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 China New City Commercial Development's Profit Performance

As we discussed above, we think the significant positive unusual item makes China New City Commercial Development'searnings a poor guide to its underlying profitability. As a result, we think it may well be the case that China New City Commercial Development's underlying earnings power is lower than its statutory profit. The good news is that it earned a profit in the last twelve months, despite its previous loss. 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 while earnings quality is important, it's equally important to consider the risks facing China New City Commercial Development at this point in time. Case in point: We've spotted 3 warning signs for China New City Commercial Development you should be mindful of and 2 of them don't sit too well with us.

Today we've zoomed in on a single data point to better understand the nature of China New City Commercial Development'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. 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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