We're Not Counting On Sunshine 100 China Holdings (HKG:2608) To Sustain Its Statutory Profitability

As a general rule, we think profitable companies are less risky than companies that lose money. 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 Sunshine 100 China Holdings' (HKG:2608) statutory profits are a good guide to its underlying earnings.

While Sunshine 100 China Holdings was able to generate revenue of CN¥8.29b in the last twelve months, we think its profit result of CN¥1.47b was more important.

Check out our latest analysis for Sunshine 100 China 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 focus on the impact unusual items have had on Sunshine 100 China Holdings' statutory earnings. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Sunshine 100 China Holdings.

How Do Unusual Items Influence Profit?

For anyone who wants to understand Sunshine 100 China Holdings' profit beyond the statutory numbers, it's important to note that during the last twelve months statutory profit gained from CN¥2.1b worth of unusual items. While it's always nice to have higher profit, a large contribution from unusual items sometimes dampens our enthusiasm. 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. And that's as you'd expect, given these boosts are described as 'unusual'. Sunshine 100 China Holdings had a rather significant contribution from unusual items relative to its profit to June 2020. All else being equal, this would likely have the effect of making the statutory profit a poor guide to underlying earnings power.

Our Take On Sunshine 100 China Holdings' Profit Performance

As we discussed above, we think the significant positive unusual item makes Sunshine 100 China Holdings'earnings a poor guide to its underlying profitability. As a result, we think it may well be the case that Sunshine 100 China Holdings' 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. The goal of this article has been to assess how well we can rely on the statutory earnings to reflect the company's potential, but there is plenty more to consider. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. To that end, you should learn about the 3 warning signs we've spotted with Sunshine 100 China Holdings (including 1 which doesn't sit too well with us).

Today we've zoomed in on a single data point to better understand the nature of Sunshine 100 China Holdings' profit. 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.

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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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