Hong Kong and China Gas' (HKG:3) Conservative Accounting Might Explain Soft Earnings

Shareholders appeared unconcerned with The Hong Kong and China Gas Company Limited's (HKG:3) lackluster earnings report last week. Our analysis suggests that while the profits are soft, the foundations of the business are strong.

Check out our latest analysis for Hong Kong and China Gas

How Do Unusual Items Influence Profit?

For anyone who wants to understand Hong Kong and China Gas' profit beyond the statutory numbers, it's important to note that during the last twelve months statutory profit was reduced by HK$1.2b due to unusual items. It's never great to see unusual items costing the company profits, but on the upside, things might improve sooner rather than later. 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. If Hong Kong and China Gas doesn't see those unusual expenses repeat, then all else being equal we'd expect its profit to increase over the coming year.

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.

Our Take On Hong Kong and China Gas' Profit Performance

Because unusual items detracted from Hong Kong and China Gas' earnings over the last year, you could argue that we can expect an improved result in the current quarter. Based on this observation, we consider it likely that Hong Kong and China Gas' statutory profit actually understates its earnings potential! On the other hand, its EPS actually shrunk in the last twelve months. 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. So if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. For example - Hong Kong and China Gas has 2 warning signs we think you should be aware of.

Today we've zoomed in on a single data point to better understand the nature of Hong Kong and China Gas' 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. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks with high insider ownership.

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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.