We're Not So Sure You Should Rely on SOHO China's (HKG:410) Statutory Earnings

By
Simply Wall St
Published
October 20, 2020
SEHK:410

Many investors consider it preferable to invest in profitable companies over unprofitable ones, because profitability suggests a business is sustainable. That said, the current statutory profit is not always a good guide to a company's underlying profitability. This article will consider whether SOHO China's (HKG:410) statutory profits are a good guide to its underlying earnings.

We like the fact that SOHO China made a profit of CN¥970.4m on its revenue of CN¥2.41b, in the last year. The chart below shows how it has grown revenue over the last three years, but that profit has declined.

Check out our latest analysis for SOHO China

earnings-and-revenue-history
SEHK:410 Earnings and Revenue History October 21st 2020

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 SOHO China's most recent profit results. That might leave you wondering what analysts are forecasting in terms of future profitability. Luckily, you can click here to see an interactive graph depicting future profitability, based on their estimates.

The Impact Of Unusual Items On Profit

For anyone who wants to understand SOHO China's profit beyond the statutory numbers, it's important to note that during the last twelve months statutory profit gained from CN¥721m worth of unusual items. While we like to see profit increases, we tend to be a little more cautious when unusual items have made a big contribution. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. And that's as you'd expect, given these boosts are described as 'unusual'. We can see that SOHO China's positive unusual items were quite significant relative to its profit in the year 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 SOHO China's Profit Performance

As we discussed above, we think the significant positive unusual item makes SOHO China'searnings a poor guide to its underlying profitability. As a result, we think it may well be the case that SOHO China's underlying earnings power is lower than its statutory profit. In further bad news, its earnings per share decreased in the last year. 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. If you'd like to know more about SOHO China as a business, it's important to be aware of any risks it's facing. Be aware that SOHO China is showing 4 warning signs in our investment analysis and 1 of those doesn't sit too well with us...

Today we've zoomed in on a single data point to better understand the nature of SOHO China's 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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