Shareholders appeared unconcerned with Guangdong Champion Asia Electronics Co.,Ltd.'s (SHSE:603386) lackluster earnings report last week. We did some digging, and we believe the earnings are stronger than they seem.
How Do Unusual Items Influence Profit?
Importantly, our data indicates that Guangdong Champion Asia ElectronicsLtd's profit was reduced by CN¥37m, due to unusual items, over the last year. It's never great to see unusual items costing the company profits, but on the upside, things might improve sooner rather than later. 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. In the twelve months to March 2024, Guangdong Champion Asia ElectronicsLtd had a big unusual items expense. All else being equal, this would likely have the effect of making the statutory profit look worse than its underlying earnings power.
Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Guangdong Champion Asia ElectronicsLtd.
An Unusual Tax Situation
Having already discussed the impact of the unusual items, we should also note that Guangdong Champion Asia ElectronicsLtd received a tax benefit of CN¥20m. This is meaningful because companies usually pay tax rather than receive tax benefits. Of course, prima facie it's great to receive a tax benefit. However, our data indicates that tax benefits can temporarily boost statutory profit in the year it is booked, but subsequently profit may fall back. Assuming the tax benefit is not repeated every year, we could see its profitability drop noticeably, all else being equal. 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 Guangdong Champion Asia ElectronicsLtd's Profit Performance
In its last report Guangdong Champion Asia ElectronicsLtd received a tax benefit which might make its profit look better than it really is on a underlying level. Having said that, it also had a unusual item reducing its profit. Considering all the aforementioned, we'd venture that Guangdong Champion Asia ElectronicsLtd's profit result is a pretty good guide to its true profitability, albeit a bit on the conservative side. So while earnings quality is important, it's equally important to consider the risks facing Guangdong Champion Asia ElectronicsLtd at this point in time. In terms of investment risks, we've identified 4 warning signs with Guangdong Champion Asia ElectronicsLtd, and understanding these should be part of your investment process.
Our examination of Guangdong Champion Asia ElectronicsLtd has focussed on certain factors that can make its earnings look better than they are. 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. 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.