Are Hi Sun Technology (China)'s (HKG:818) Statutory Earnings A Good Guide To Its Underlying Profitability?

Many investors consider it preferable to invest in profitable companies over unprofitable ones, because profitability suggests a business is sustainable. 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. In this article, we'll look at how useful this year's statutory profit is, when analysing Hi Sun Technology (China) (HKG:818).

It's good to see that over the last twelve months Hi Sun Technology (China) made a profit of HK$398.0m on revenue of HK$4.59b. Happily, it has grown both its profit and revenue over the last three years (but not in the last year), as you can see in the chart below.

Check out our latest analysis for Hi Sun Technology (China)

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 Hi Sun Technology (China)'s statutory earnings. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Hi Sun Technology (China).

The Impact Of Unusual Items On Profit

For anyone who wants to understand Hi Sun Technology (China)'s profit beyond the statutory numbers, it's important to note that during the last twelve months statutory profit was reduced by HK$83m due to unusual items. 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 Hi Sun Technology (China) to produce a higher profit next year, all else being equal.

Our Take On Hi Sun Technology (China)'s Profit Performance

Unusual items (expenses) detracted from Hi Sun Technology (China)'s earnings over the last year, but we might see an improvement next year. Based on this observation, we consider it likely that Hi Sun Technology (China)'s statutory profit actually understates its earnings potential! And the EPS is up 8.5% annually, over the last three years. 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. So if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. You'd be interested to know, that we found 1 warning sign for Hi Sun Technology (China) and you'll want to know about this.

This note has only looked at a single factor that sheds light on the nature of Hi Sun Technology (China)'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. While it might take a little research on your behalf, you may find this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying to be useful.

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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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