Does Hung Sheng Construction's (TPE:2534) Statutory Profit Adequately Reflect Its Underlying Profit?

As a general rule, we think profitable companies are less risky than companies that lose money. Having said that, sometimes statutory profit levels are not a good guide to ongoing profitability, because some short term one-off factor has impacted profit levels. In this article, we'll look at how useful this year's statutory profit is, when analysing Hung Sheng Construction (TPE:2534).

While Hung Sheng Construction was able to generate revenue of NT$2.86b in the last twelve months, we think its profit result of NT$605.7m was more important. The chart below shows that both revenue and profit have declined over the last three years.

Check out our latest analysis for Hung Sheng Construction

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 Hung Sheng Construction'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 Hung Sheng Construction.

The Impact Of Unusual Items On Profit

For anyone who wants to understand Hung Sheng Construction's profit beyond the statutory numbers, it's important to note that during the last twelve months statutory profit gained from NT$62m 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. And that's as you'd expect, given these boosts are described as 'unusual'. Assuming those unusual items don't show up again in the current year, we'd thus expect profit to be weaker next year (in the absence of business growth, that is).

Our Take On Hung Sheng Construction's Profit Performance

Arguably, Hung Sheng Construction's statutory earnings have been distorted by unusual items boosting profit. Therefore, it seems possible to us that Hung Sheng Construction's true underlying earnings power is actually less than its statutory profit. In further bad news, its earnings per share decreased in the last year. Of course, we've only just scratched the surface when it comes to analysing its earnings; one could also consider margins, forecast growth, and return on investment, among other factors. If you want to do dive deeper into Hung Sheng Construction, you'd also look into what risks it is currently facing. Our analysis shows 3 warning signs for Hung Sheng Construction (1 is potentially serious!) and we strongly recommend you look at these bad boys before investing.

Today we've zoomed in on a single data point to better understand the nature of Hung Sheng Construction'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. 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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