The subdued market reaction suggests that Luzhou Xinglu Water (Group) Co., Ltd.'s (HKG:2281) recent earnings didn't contain any surprises. However, we believe that investors should be aware of some underlying factors which may be of concern.

See our latest analysis for Luzhou Xinglu Water (Group)

How Do Unusual Items Influence Profit?

To properly understand Luzhou Xinglu Water (Group)'s profit results, we need to consider the CN¥31m gain attributed to unusual items. While it's always nice to have higher profit, a large contribution from unusual items sometimes dampens our enthusiasm. 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. If Luzhou Xinglu Water (Group) doesn't see that contribution repeat, then all else being equal we'd expect its profit to drop over the current year.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Luzhou Xinglu Water (Group).

Our Take On Luzhou Xinglu Water (Group)'s Profit Performance

Arguably, Luzhou Xinglu Water (Group)'s statutory earnings have been distorted by unusual items boosting profit. Therefore, it seems possible to us that Luzhou Xinglu Water (Group)'s true underlying earnings power is actually less than its statutory profit. But at least holders can take some solace from the 57% per annum growth in EPS for the last three. At the end of the day, it's essential to consider more than just the factors above, if you want to understand the company properly. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. For instance, we've identified 3 warning signs for Luzhou Xinglu Water (Group) (1 is potentially serious) you should be familiar with.

Today we've zoomed in on a single data point to better understand the nature of Luzhou Xinglu Water (Group)'s profit. But there are plenty of other ways to inform your opinion of a company. 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.