China Shengmu Organic Milk Limited's (HKG:1432) solid earnings announcement recently didn't do much to the stock price. Our analysis suggests that shareholders might be missing some positive underlying factors in the earnings report.

Check out our latest analysis for China Shengmu Organic Milk

The Impact Of Unusual Items On Profit

To properly understand China Shengmu Organic Milk's profit results, we need to consider the CN¥314m 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 that's hardly a surprise given these line items are considered unusual. If China Shengmu Organic Milk doesn't see those unusual expenses repeat, then all else being equal we'd expect its profit to increase over the coming year.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of China Shengmu Organic Milk.

Our Take On China Shengmu Organic Milk's Profit Performance

Because unusual items detracted from China Shengmu Organic Milk's earnings over the last year, you could argue that we can expect an improved result in the current quarter. Because of this, we think China Shengmu Organic Milk's earnings potential is at least as good as it seems, and maybe even better! And the EPS is up 5.3% 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. So if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. For example - China Shengmu Organic Milk has 2 warning signs we think you should be aware of.

Today we've zoomed in on a single data point to better understand the nature of China Shengmu Organic Milk's profit. But there is always more to discover if you are capable of focussing your mind on minutiae. 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.