China Dredging Environment Protection Holdings' (HKG:871) Promising Earnings May Rest On Soft Foundations

Despite posting some strong earnings, the market for China Dredging Environment Protection Holdings Limited's (HKG:871) stock hasn't moved much. We did some digging, and we found some concerning factors in the details.

See our latest analysis for China Dredging Environment Protection Holdings

How Do Unusual Items Influence Profit?

To properly understand China Dredging Environment Protection Holdings' profit results, we need to consider the CN¥51m gain attributed to unusual items. While it's always nice to have higher profit, a large contribution from unusual items sometimes dampens our enthusiasm. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. And, after all, that's exactly what the accounting terminology implies. China Dredging Environment Protection Holdings had a rather significant contribution from unusual items relative to its profit to December 2021. All else being equal, this would likely have the effect of making the statutory profit a poor guide to underlying earnings power.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of China Dredging Environment Protection Holdings.

Our Take On China Dredging Environment Protection Holdings' Profit Performance

As previously mentioned, China Dredging Environment Protection Holdings' large boost from unusual items won't be there indefinitely, so its statutory earnings are probably a poor guide to its underlying profitability. For this reason, we think that China Dredging Environment Protection Holdings' statutory profits may be a bad guide to its underlying earnings power, and might give investors an overly positive impression of the company. The good news is that it earned a profit in the last twelve months, despite its previous loss. At the end of the day, it's essential to consider more than just the factors above, if you want to understand the company properly. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. While conducting our analysis, we found that China Dredging Environment Protection Holdings has 4 warning signs and it would be unwise to ignore them.

Today we've zoomed in on a single data point to better understand the nature of China Dredging Environment Protection Holdings' profit. But there are plenty of other ways to inform your opinion of a company. 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. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.