Wuxi Double Elephant Micro Fibre Material Co.,Ltd (SZSE:002395) just reported some strong earnings, and the market reacted accordingly with a healthy uplift in the share price. We did some analysis and think that investors are missing some details hidden beneath the profit numbers.
How Do Unusual Items Influence Profit?
For anyone who wants to understand Wuxi Double Elephant Micro Fibre MaterialLtd's profit beyond the statutory numbers, it's important to note that during the last twelve months statutory profit gained from CN¥11m worth of unusual items. 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. Which is hardly surprising, given the name. If Wuxi Double Elephant Micro Fibre MaterialLtd 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 Wuxi Double Elephant Micro Fibre MaterialLtd.
Our Take On Wuxi Double Elephant Micro Fibre MaterialLtd's Profit Performance
We'd posit that Wuxi Double Elephant Micro Fibre MaterialLtd's statutory earnings aren't a clean read on ongoing productivity, due to the large unusual item. Therefore, it seems possible to us that Wuxi Double Elephant Micro Fibre MaterialLtd's true underlying earnings power is actually less than its statutory profit. On the bright side, the company showed enough improvement to book a profit this year, after losing money last year. 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. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. Our analysis shows 2 warning signs for Wuxi Double Elephant Micro Fibre MaterialLtd (1 is a bit unpleasant!) and we strongly recommend you look at these before investing.
Today we've zoomed in on a single data point to better understand the nature of Wuxi Double Elephant Micro Fibre MaterialLtd'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.
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.