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 Yanzhou Coal Mining (HKG:1171).
While Yanzhou Coal Mining was able to generate revenue of CN¥204.3b in the last twelve months, we think its profit result of CN¥8.49b was more important. Happily, it has grown both its profit and revenue over the last three years (though we note its profit is down over the last year).
Check out our latest analysis for Yanzhou Coal Mining
Of course, it is only sensible to look beyond the statutory profits and question how well those numbers represent the sustainable earnings power of the business. This article, will discuss how unusual items and a spike in non operating revenue have impacted Yanzhou Coal Mining’s most recent results. That might leave you wondering what analysts are forecasting in terms of future profitability. Luckily, you can click here to see an interactive graph depicting future profitability, based on their estimates.
The Power Of Non-Operating Revenue
At most companies, some revenue streams, such as government grants, are accounted for as non-operating revenue, while the core business is said to produce operating revenue. Oftentimes, non-operating revenue spikes are not repeated, so it makes sense to be cautious where non-operating revenue has made a very large contribution to total profit. However, we note that when non-operating revenue increases suddenly, it will sometimes generate an unsustainable boost to profit. Notably, Yanzhou Coal Mining had a significant increase in non-operating revenue over the last year. In fact, our data indicates that non-operating revenue increased from CN¥192.7b to CN¥204.3b. The high levels of non-operating are problematic because if (and when) they do not repeat, then overall revenue (and profitability) of the firm will fall. Sometimes, you can get a better idea of the underlying earnings potential of a company by excluding unusual boosts to non-operating revenue.
How Do Unusual Items Influence Profit?
Alongside that spike in non-operating revenue, it’s also important to note that Yanzhou Coal Mining’sprofit was boosted by unusual items worth CN¥1.4b in the last twelve months. While we like to see profit increases, we tend to be a little more cautious when unusual items have made a big contribution. We ran the numbers on most publicly listed companies worldwide, and it’s very common for unusual items to be once-off in nature. 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 Yanzhou Coal Mining’s Profit Performance
In the last year Yanzhou Coal Mining’s non-operating revenue really gave it a boost, but not in a way that is necessarily going to be sustained. And on top of that, it also saw an unusual item boost its profit, suggesting that next year might see a lower profit number, if these events are not repeated and everything else is equal. Considering all this we’d argue Yanzhou Coal Mining’s profits probably give an overly generous impression of its sustainable level of profitability. So while earnings quality is important, it’s equally important to consider the risks facing Yanzhou Coal Mining at this point in time. For instance, we’ve identified 3 warning signs for Yanzhou Coal Mining (2 make us uncomfortable) you should be familiar with.
Our examination of Yanzhou Coal Mining has focussed on certain factors that can make its earnings look better than they are. And, on that basis, we are somewhat skeptical. But there is always more to discover if you are capable of focussing your mind on minutiae. For example, many people consider a high return on equity as an indication of favorable business economics, while others like to ‘follow the money’ and search out stocks that insiders are buying. 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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