The market shrugged off Jiangsu chunlan refrigerating equipment stock co.,ltd.'s (SHSE:600854) solid earnings report. We think that investors might be worried about some concerning underlying factors.

The Power Of Non-Operating Revenue

Most companies divide classify their revenue as either 'operating revenue', which comes from normal operations, and other revenue, which could include government grants, for example. Where possible, we prefer rely on operating revenue to get a better understanding of how the business is functioning. Importantly, the non-operating revenue often comes without associated ongoing costs, so it can boost profit by letting it fall straight to the bottom line, making the operating business seem better than it really is. It's worth noting that Jiangsu chunlan refrigerating equipment stockltd saw a big increase in non-operating revenue as a proportion of total revenue over the last year. Indeed, this proportion rose from 19% last year to 26% this year. If that non-operating revenue fails to manifest in the current year, then there's a real risk the bottom line profit result will be impacted negatively. Sometimes, you can get a better idea of the underlying earnings potential of a company by excluding unusual boosts to non-operating revenue.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Jiangsu chunlan refrigerating equipment stockltd.

The Impact Of Unusual Items On Profit

Alongside that spike in non-operating revenue, it's also important to note that Jiangsu chunlan refrigerating equipment stockltd'sprofit was boosted by unusual items worth CN¥4.2m in the last twelve months. While it's always nice to have higher profit, a large contribution from unusual items sometimes dampens our enthusiasm. We ran the numbers on most publicly listed companies worldwide, and it's very common for unusual items to be once-off in nature. Which is hardly surprising, given the name. Assuming those unusual items don't show up again in the current year, we'd thus expect profit to be weaker next year (in the absence of business growth, that is).

Our Take On Jiangsu chunlan refrigerating equipment stockltd's Profit Performance

In its last report Jiangsu chunlan refrigerating equipment stockltd benefitted from a spike in non-operating revenue which may have boosted its profit in a way that may be no more sustainable than low quality coal mining. And on top of that, it also saw an unusual item boost its profit, suggesting that next year might see a lower profit number, if these events are not repeated and everything else is equal. For the reasons mentioned above, we think that a perfunctory glance at Jiangsu chunlan refrigerating equipment stockltd's statutory profits might make it look better than it really is on an underlying level. So while earnings quality is important, it's equally important to consider the risks facing Jiangsu chunlan refrigerating equipment stockltd at this point in time. Case in point: We've spotted 1 warning sign for Jiangsu chunlan refrigerating equipment stockltd you should be aware of.

Our examination of Jiangsu chunlan refrigerating equipment stockltd has focussed on certain factors that can make its earnings look better than they are. And, on that basis, we are somewhat skeptical. But there is always more to discover if you are capable of focussing your mind on minutiae. 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. 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.