The market rallied behind Shenzhen Zhilai Sci and Tech Co., Ltd.'s (SZSE:300771) stock, leading do a rise in the share price after its recent weak earnings report. While shareholders may be willing to overlook soft profit numbers, we believe that they should also be taking into account some other factors which may be cause for concern.

How Do Unusual Items Influence Profit?

Importantly, our data indicates that Shenzhen Zhilai Sci and Tech's profit received a boost of CN¥22m in unusual items, over the last year. 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'. Shenzhen Zhilai Sci and Tech had a rather significant contribution from unusual items relative to its profit to March 2024. As a result, we can surmise that the unusual items are making its statutory profit significantly stronger than it would otherwise be.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Shenzhen Zhilai Sci and Tech.

Our Take On Shenzhen Zhilai Sci and Tech's Profit Performance

As previously mentioned, Shenzhen Zhilai Sci and Tech's large boost from unusual items won't be there indefinitely, so its statutory earnings are probably a poor guide to its underlying profitability. For this reason, we think that Shenzhen Zhilai Sci and Tech's statutory profits may be a bad guide to its underlying earnings power, and might give investors an overly positive impression of the company. Sadly, its EPS was down over the last twelve months. 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 want to do dive deeper into Shenzhen Zhilai Sci and Tech, you'd also look into what risks it is currently facing. Every company has risks, and we've spotted 5 warning signs for Shenzhen Zhilai Sci and Tech (of which 2 are a bit unpleasant!) you should know about.

Today we've zoomed in on a single data point to better understand the nature of Shenzhen Zhilai Sci and Tech'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.