The recent earnings posted by Sichuan Newsnet Media (Group) Co.,Ltd. (SZSE:300987) were solid, but the stock didn't move as much as we expected. We believe that shareholders have noticed some concerning factors beyond the statutory profit numbers.
The Impact Of Unusual Items On Profit
To properly understand Sichuan Newsnet Media (Group)Ltd's profit results, we need to consider the CN¥2.1m gain attributed to unusual items. While we like to see profit increases, we tend to be a little more cautious when unusual items have made a big contribution. 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. 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 Sichuan Newsnet Media (Group)Ltd.
An Unusual Tax Situation
Just as we noted the unusual items, we must inform you that Sichuan Newsnet Media (Group)Ltd received a tax benefit which contributed CN¥1.7m to the bottom line. 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. In the likely event the tax benefit is not repeated, we'd expect to see its statutory profit levels drop, at least in the absence of strong growth. While we think it's good that the company has booked a tax benefit, it does mean that there's every chance the statutory profit will come in a lot higher than it would be if the income was adjusted for one-off factors.
Our Take On Sichuan Newsnet Media (Group)Ltd's Profit Performance
In its last report Sichuan Newsnet Media (Group)Ltd received a tax benefit which might make its profit look better than it really is on a underlying level. Furthermore, it also benefitted from a positive unusual item, which boosted the profit result even higher. Considering all this we'd argue Sichuan Newsnet Media (Group)Ltd's profits probably give an overly generous impression of its sustainable level of profitability. If you want to do dive deeper into Sichuan Newsnet Media (Group)Ltd, you'd also look into what risks it is currently facing. Be aware that Sichuan Newsnet Media (Group)Ltd is showing 3 warning signs in our investment analysis and 1 of those doesn't sit too well with us...
In this article we've looked at a number of factors that can impair the utility of profit numbers, and we've come away cautious. 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. 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.