The recent earnings posted by Chengdu Gas Group Corporation Ltd. (SHSE:603053) were solid, but the stock didn't move as much as we expected. We think this is due to investors looking beyond the statutory profits and being concerned with what they see.
How Do Unusual Items Influence Profit?
Importantly, our data indicates that Chengdu Gas Group's profit received a boost of CN¥46m in unusual items, over the last year. 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, after all, that's exactly what the accounting terminology implies. 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).
Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Chengdu Gas Group.
Our Take On Chengdu Gas Group's Profit Performance
Arguably, Chengdu Gas Group's statutory earnings have been distorted by unusual items boosting profit. Therefore, it seems possible to us that Chengdu Gas Group's true underlying earnings power is actually less than its statutory profit. The good news is that its earnings per share increased slightly 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. So while earnings quality is important, it's equally important to consider the risks facing Chengdu Gas Group at this point in time. In terms of investment risks, we've identified 1 warning sign with Chengdu Gas Group, and understanding it should be part of your investment process.
Today we've zoomed in on a single data point to better understand the nature of Chengdu Gas Group'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 with high insider ownership.
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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.