We're Not Counting On Fu Chian TireLtd (GTSM:5102) To Sustain Its Statutory Profitability

Statistically speaking, it is less risky to invest in profitable companies than in unprofitable ones. That said, the current statutory profit is not always a good guide to a company's underlying profitability. In this article, we'll look at how useful this year's statutory profit is, when analysing Fu Chian TireLtd (GTSM:5102).

It's good to see that over the last twelve months Fu Chian TireLtd made a profit of NT$44.5m on revenue of NT$573.3m. Below, you can see that both its revenue and its profit have fallen over the last three years.

View our latest analysis for Fu Chian TireLtd

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 discuss how unusual items have impacted Fu Chian TireLtd's most recent profit results. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Fu Chian TireLtd.

How Do Unusual Items Influence Profit?

For anyone who wants to understand Fu Chian TireLtd's profit beyond the statutory numbers, it's important to note that during the last twelve months statutory profit gained from NT$32m worth of unusual items. We can't deny that higher profits generally leave us optimistic, but we'd prefer it if the profit were to be sustainable. When we crunched the numbers on thousands of publicly listed companies, we found that a boost from unusual items in a given year is often not repeated the next year. Which is hardly surprising, given the name. We can see that Fu Chian TireLtd's positive unusual items were quite significant relative to its profit in the year to September 2020. All else being equal, this would likely have the effect of making the statutory profit a poor guide to underlying earnings power.

Our Take On Fu Chian TireLtd's Profit Performance

As we discussed above, we think the significant positive unusual item makes Fu Chian TireLtd'searnings a poor guide to its underlying profitability. As a result, we think it may well be the case that Fu Chian TireLtd's underlying earnings power is lower than its statutory profit. But at least holders can take some solace from the 18% EPS growth in the last year. 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. Be aware that Fu Chian TireLtd is showing 4 warning signs in our investment analysis and 1 of those is a bit unpleasant...

This note has only looked at a single factor that sheds light on the nature of Fu Chian TireLtd's profit. 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 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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