Prosperous Industrial (Holdings) Limited's (HKG:1731) robust recent earnings didn't do much to move the stock. We believe that shareholders have noticed some concerning factors beyond the statutory profit numbers.

View our latest analysis for Prosperous Industrial (Holdings)

The Impact Of Unusual Items On Profit

To properly understand Prosperous Industrial (Holdings)'s profit results, we need to consider the US$2.4m expense attributed to unusual items. It's never great to see unusual items costing the company profits, but on the upside, things might improve sooner rather than later. We looked at thousands of listed companies and found that unusual items are very often one-off in nature. And, after all, that's exactly what the accounting terminology implies. Prosperous Industrial (Holdings) took a rather significant hit from unusual items in the year to December 2021. 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 Prosperous Industrial (Holdings).

An Unusual Tax Situation

Having already discussed the impact of the unusual items, we should also note that Prosperous Industrial (Holdings) received a tax benefit of US$2.8m. 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, 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 Prosperous Industrial (Holdings)'s Profit Performance

In its last report Prosperous Industrial (Holdings) 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. Given the contrasting considerations, we don't have a strong view as to whether Prosperous Industrial (Holdings)'s profits are an apt reflection of its underlying potential for profit. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. For example, we've found that Prosperous Industrial (Holdings) has 4 warning signs (1 is potentially serious!) that deserve your attention before going any further with your analysis.

In this article we've looked at a number of factors that can impair the utility of profit numbers, as a guide to a business. But there are plenty of other ways to inform your opinion of a company. 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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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.