Zhe Jiang Headman Machinery Co.,Ltd.'s (SHSE:688577) stock was strong despite it releasing a soft earnings report last week. Our analysis suggests that investors may have noticed some promising signs beyond the statutory profit figures.
The Impact Of Unusual Items On Profit
To properly understand Zhe Jiang Headman MachineryLtd's profit results, we need to consider the CN¥3.3m expense attributed to unusual items. While deductions due to unusual items are disappointing in the first instance, there is a silver lining. We looked at thousands of listed companies and found that unusual items are very often one-off in nature. And, after all, that's exactly what the accounting terminology implies. Assuming those unusual expenses don't come up again, we'd therefore expect Zhe Jiang Headman MachineryLtd to produce a higher profit next year, all else being equal.
Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Zhe Jiang Headman MachineryLtd.
An Unusual Tax Situation
Just as we noted the unusual items, we must inform you that Zhe Jiang Headman MachineryLtd received a tax benefit which contributed CN¥1.9m to the bottom line. This is meaningful because companies usually pay tax rather than receive tax benefits. The receipt of a tax benefit is obviously a good thing, on its own. 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. Assuming the tax benefit is not repeated every year, we could see its profitability drop noticeably, all else being equal. 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 Zhe Jiang Headman MachineryLtd's Profit Performance
In its last report Zhe Jiang Headman MachineryLtd 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. Based on these factors, it's hard to tell if Zhe Jiang Headman MachineryLtd's profits are a reasonable reflection of its underlying profitability. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. For example, we've found that Zhe Jiang Headman MachineryLtd has 4 warning signs (2 make us uncomfortable!) that deserve your attention before going any further with your analysis.
In this article we've looked at a number of factors that can impair the utility of profit numbers, as a guide to a business. But there are plenty of other ways to inform your opinion of a company. 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. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.
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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.