Foshan NationStar Optoelectronics Co.,Ltd's (SZSE:002449) lackluster earnings announcement last week disappointed investors. We think that they may have more to worry about than just soft profit numbers.

How Do Unusual Items Influence Profit?

Importantly, our data indicates that Foshan NationStar OptoelectronicsLtd's profit received a boost of CN¥42m 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. When we crunched the numbers on thousands of publicly listed companies, we found that a boost from unusual items in a given year is often not repeated the next year. And, after all, that's exactly what the accounting terminology implies. Foshan NationStar OptoelectronicsLtd had a rather significant contribution from unusual items relative to its profit to December 2023. All else being equal, this would likely have the effect of making the statutory profit a poor guide to underlying earnings power.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Foshan NationStar OptoelectronicsLtd.

An Unusual Tax Situation

Just as we noted the unusual items, we must inform you that Foshan NationStar OptoelectronicsLtd received a tax benefit which contributed CN¥3.4m to the bottom line. It's always a bit noteworthy when a company is paid by the tax man, rather than paying the tax man. 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.

Our Take On Foshan NationStar OptoelectronicsLtd's Profit Performance

In its last report Foshan NationStar OptoelectronicsLtd received a tax benefit which might make its profit look better than it really is on a underlying level. Furthermore, it also benefitted from a positive unusual item, which boosted the profit result even higher. For the reasons mentioned above, we think that a perfunctory glance at Foshan NationStar OptoelectronicsLtd's statutory profits might make it look better than it really is on an underlying level. If you want to do dive deeper into Foshan NationStar OptoelectronicsLtd, you'd also look into what risks it is currently facing. To help with this, we've discovered 3 warning signs (1 doesn't sit too well with us!) that you ought to be aware of before buying any shares in Foshan NationStar OptoelectronicsLtd.

In this article we've looked at a number of factors that can impair the utility of profit numbers, and we've come away cautious. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.