Does United Strength Power Holdings's (HKG:2337) Statutory Profit Adequately Reflect Its Underlying Profit?

Broadly speaking, profitable businesses are less risky than unprofitable ones. Having said that, sometimes statutory profit levels are not a good guide to ongoing profitability, because some short term one-off factor has impacted profit levels. Today we'll focus on whether this year's statutory profits are a good guide to understanding United Strength Power Holdings (HKG:2337).

It's good to see that over the last twelve months United Strength Power Holdings made a profit of CN¥20.2m on revenue of CN¥335.5m. The chart below shows how it has grown revenue over the last three years, but that profit has declined.

See our latest analysis for United Strength Power 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. In this article we'll look at how United Strength Power Holdings is impacting shareholders by issuing new shares, as well as how unusual items have affected the income line. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of United Strength Power Holdings.

To understand the value of a company's earnings growth, it is imperative to consider any dilution of shareholders' interests. United Strength Power Holdings expanded the number of shares on issue by 60% over the last year. That means its earnings are split among a greater number of shares. To talk about net income, without noticing earnings per share, is to be distracted by the big numbers while ignoring the smaller numbers that talk to per share value. Check out United Strength Power Holdings' historical EPS growth by clicking on this link.

A Look At The Impact Of United Strength Power Holdings' Dilution on Its Earnings Per Share (EPS).

Unfortunately, United Strength Power Holdings' profit is down 12% per year over three years. Even looking at the last year, profit was still down 55%. Like a sack of potatoes thrown from a delivery truck, EPS fell harder, down 55% in the same period. Therefore, one can observe that the dilution is having a fairly profound effect on shareholder returns.

If United Strength Power Holdings' EPS can grow over time then that drastically improves the chances of the share price moving in the same direction. But on the other hand, we'd be far less excited to learn profit (but not EPS) was improving. For that reason, you could say that EPS is more important that net income in the long run, assuming the goal is to assess whether a company's share price might grow.

The Impact Of Unusual Items On Profit

On top of the dilution, we should also consider the CN¥6.7m impact of unusual items in the last year, which had the effect of suppressing profit. While deductions due to unusual items are disappointing in the first instance, there is a silver lining. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. And that's hardly a surprise given these line items are considered unusual. Assuming those unusual expenses don't come up again, we'd therefore expect United Strength Power Holdings to produce a higher profit next year, all else being equal.

Our Take On United Strength Power Holdings' Profit Performance

United Strength Power Holdings suffered from unusual items which depressed its profit in its last report; if that is not repeated then profit should be higher, all else being equal. But on the other hand, the company issued more shares, so without buying more shares each shareholder will end up with a smaller part of the profit. Having considered these factors, we don't think United Strength Power Holdings' statutory profits give an overly harsh view of the business. In light of this, if you'd like to do more analysis on the company, it's vital to be informed of the risks involved. When we did our research, we found 3 warning signs for United Strength Power Holdings (1 is potentially serious!) that we believe deserve your full attention.

In this article we've looked at a number of factors that can impair the utility of profit numbers, as a guide to a business. 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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