A lackluster earnings announcement from South China Vocational Education Group Company Limited (HKG:6913) last week didn't sink the stock price. We think that investors are worried about some weaknesses underlying the earnings.
An Unusual Tax Situation
We can see that South China Vocational Education Group received a tax benefit of CN¥6.0m. This is meaningful because companies usually pay tax rather than receive tax benefits. The receipt of a tax benefit is obviously a good thing, on its own. However, our data indicates that tax benefits can temporarily boost statutory profit in the year it is booked, but subsequently profit may fall back. 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.
Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of South China Vocational Education Group.
Our Take On South China Vocational Education Group's Profit Performance
As we have already discussed South China Vocational Education Group reported that it received a tax benefit, rather than paying tax, in the last year. As a result we don't think its profit result, which includes that tax-boost, is a good guide to its sustainable profit levels. Because of this, we think that it may be that South China Vocational Education Group's statutory profits are better than its underlying earnings power. In further bad news, its earnings per share decreased in the last year. The goal of this article has been to assess how well we can rely on the statutory earnings to reflect the company's potential, but there is plenty more to consider. If you'd like to know more about South China Vocational Education Group as a business, it's important to be aware of any risks it's facing. For example, South China Vocational Education Group has 4 warning signs (and 1 which is potentially serious) we think you should know about.
Today we've zoomed in on a single data point to better understand the nature of South China Vocational Education Group's profit. 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 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.