The subdued market reaction suggests that Shenzhen Etmade Automatic Equipment Co., Ltd.'s (SZSE:300812) recent earnings didn't contain any surprises. We think that investors are worried about some weaknesses underlying the earnings.

How Do Unusual Items Influence Profit?

Importantly, our data indicates that Shenzhen Etmade Automatic Equipment's profit was reduced by CN¥11m, due to unusual items, over the last year. It's never great to see unusual items costing the company profits, but on the upside, things might improve sooner rather than later. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. And that's hardly a surprise given these line items are considered unusual. In the twelve months to March 2024, Shenzhen Etmade Automatic Equipment had a big unusual items expense. As a result, we can surmise that the unusual items made its statutory profit significantly weaker 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 Etmade Automatic Equipment.

An Unusual Tax Situation

Having already discussed the impact of the unusual items, we should also note that Shenzhen Etmade Automatic Equipment received a tax benefit of CN¥15m. 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, the devil in the detail is that these kind of benefits only impact in the year they are booked, and are often one-off in nature. In the likely event the tax benefit is not repeated, we'd expect to see its statutory profit levels drop, at least in the absence of strong growth. So while we think it's great to receive a tax benefit, it does tend to imply an increased risk that the statutory profit overstates the sustainable earnings power of the business.

Our Take On Shenzhen Etmade Automatic Equipment's Profit Performance

In its last report Shenzhen Etmade Automatic Equipment received a tax benefit which might make its profit look better than it really is on a underlying level. But on the other hand, it also saw an unusual item depress its profit. Given the contrasting considerations, we don't have a strong view as to whether Shenzhen Etmade Automatic Equipment's profits are an apt reflection of its underlying potential for profit. If you want to do dive deeper into Shenzhen Etmade Automatic Equipment, you'd also look into what risks it is currently facing. Be aware that Shenzhen Etmade Automatic Equipment is showing 4 warning signs in our investment analysis and 1 of those doesn't sit too well with us...

Our examination of Shenzhen Etmade Automatic Equipment has focussed on certain factors that can make its earnings look better than they are. 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.