Beyond Lackluster Earnings: Potential Concerns For HANSHIN Engineering & Construction's (KRX:004960) Shareholders

Shareholders didn't appear too concerned by HANSHIN Engineering & Construction Co., Ltd.'s (KRX:004960) weak earnings. We did some digging, and we believe that investors are missing some worrying factors underlying the profit figures.

See our latest analysis for HANSHIN Engineering & Construction

The Impact Of Unusual Items On Profit

For anyone who wants to understand HANSHIN Engineering & Construction's profit beyond the statutory numbers, it's important to note that during the last twelve months statutory profit gained from ₩28b worth of 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. Which is hardly surprising, given the name. We can see that HANSHIN Engineering & Construction's positive unusual items were quite significant relative to its profit in the year to December 2023. 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 HANSHIN Engineering & Construction.

An Unusual Tax Situation

Just as we noted the unusual items, we must inform you that HANSHIN Engineering & Construction received a tax benefit which contributed ₩4.1b to the bottom line. This is of course a bit out of the ordinary, given it is more common for companies to be paying tax than receiving tax benefits! We're sure the company was pleased with its tax benefit. However, our data indicates that tax benefits can temporarily boost statutory profit in the year it is booked, but subsequently profit may fall back. In the likely event the tax benefit is not repeated, we'd expect to see its statutory profit levels drop, at least in the absence of strong growth.

Our Take On HANSHIN Engineering & Construction's Profit Performance

In the last year HANSHIN Engineering & Construction received a tax benefit, which boosted its profit in a way that might not be much more sustainable than turning prime farmland into gas fields. Furthermore, it also benefitted from a positive unusual item, which boosted the profit result even higher. Considering all this we'd argue HANSHIN Engineering & Construction's profits probably give an overly generous impression of its sustainable level of profitability. If you want to do dive deeper into HANSHIN Engineering & Construction, you'd also look into what risks it is currently facing. Our analysis shows 6 warning signs for HANSHIN Engineering & Construction (2 shouldn't be ignored!) and we strongly recommend you look at these before investing.

In this article we've looked at a number of factors that can impair the utility of profit numbers, and we've come away cautious. 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.