Here's Why We Don't Think China Electric Mfg's (TPE:1611) Statutory Earnings Reflect Its Underlying Earnings Potential

Broadly speaking, profitable businesses are less risky than unprofitable ones. However, sometimes companies receive a one-off boost (or reduction) to their profit, and it's not always clear whether statutory profits are a good guide, going forward. Today we'll focus on whether this year's statutory profits are a good guide to understanding China Electric Mfg (TPE:1611).

While China Electric Mfg was able to generate revenue of NT$2.19b in the last twelve months, we think its profit result of NT$806.4m was more important. The chart below shows that while revenue has fallen over the last three years, the company has moved from unprofitable to profitable.

View our latest analysis for China Electric Mfg

Importantly, statutory profits are not always the best tool for understanding a company's true earnings power, so it's well worth examining profits in a little more detail. This article will discuss how unusual items have impacted China Electric Mfg'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 China Electric Mfg.

The Impact Of Unusual Items On Profit

For anyone who wants to understand China Electric Mfg's profit beyond the statutory numbers, it's important to note that during the last twelve months statutory profit gained from NT$937m 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 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. And that's as you'd expect, given these boosts are described as 'unusual'. We can see that China Electric Mfg'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 China Electric Mfg's Profit Performance

As previously mentioned, China Electric Mfg's 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 Electric Mfg's statutory profits may be a bad guide to its underlying earnings power, and might give investors an overly positive impression of the company. But the happy news is that, while acknowledging we have to look beyond the statutory numbers, those numbers are still improving, with EPS growing at a very high rate over the last year. 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. If you'd like to know more about China Electric Mfg as a business, it's important to be aware of any risks it's facing. Case in point: We've spotted 2 warning signs for China Electric Mfg you should be aware of.

This note has only looked at a single factor that sheds light on the nature of China Electric Mfg's profit. But there are plenty of other ways to inform your opinion of a company. Some people consider a high return on equity to be a good sign of a quality business. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.

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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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