Hanjin Heavy Industries & Construction Holdings' (KRX:003480) Earnings Are Weaker Than They Seem

Hanjin Heavy Industries & Construction Holdings Co., Ltd. (KRX:003480) announced strong profits, but the stock was stagnant. We did some digging, and we found some concerning factors in the details.

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The Impact Of Unusual Items On Profit

To properly understand Hanjin Heavy Industries & Construction Holdings' profit results, we need to consider the ₩14b 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. If Hanjin Heavy Industries & Construction Holdings doesn't see that contribution repeat, then all else being equal we'd expect its profit to drop over the current year.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Hanjin Heavy Industries & Construction Holdings.

An Unusual Tax Situation

Having already discussed the impact of the unusual items, we should also note that Hanjin Heavy Industries & Construction Holdings received a tax benefit of ₩12b. This is meaningful because companies usually pay tax rather than receive tax benefits. We're sure the company was pleased with its tax benefit. However, the devil in the detail is that these kind of benefits only impact in the year they are booked, and are often one-off in nature. Assuming the tax benefit is not repeated every year, we could see its profitability drop noticeably, all else being equal. So while we think it's great to receive a tax benefit, it does tend to imply an increased risk that the statutory profit overstates the sustainable earnings power of the business.

Our Take On Hanjin Heavy Industries & Construction Holdings' Profit Performance

In the last year Hanjin Heavy Industries & Construction Holdings 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 Hanjin Heavy Industries & Construction Holdings' profits probably give an overly generous impression of its sustainable level of profitability. If you'd like to know more about Hanjin Heavy Industries & Construction Holdings as a business, it's important to be aware of any risks it's facing. To that end, you should learn about the 3 warning signs we've spotted with Hanjin Heavy Industries & Construction Holdings (including 1 which can't be ignored).

Our examination of Hanjin Heavy Industries & Construction Holdings has focussed on certain factors that can make its earnings look better than they are. And, on that basis, we are somewhat skeptical. But there is always more to discover if you are capable of focussing your mind on minutiae. Some people consider a high return on equity to be a good sign of a quality business. 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 with significant insider holdings 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.