The market rallied behind Sichuan Zhongguang Lightning Protection Technologies Co., Ltd.'s (SZSE:300414) stock, leading do a rise in the share price after its recent weak earnings report. We think that shareholders might be missing some concerning factors that our analysis found.

How Do Unusual Items Influence Profit?

To properly understand Sichuan Zhongguang Lightning Protection Technologies' profit results, we need to consider the CN¥4.3m gain attributed to unusual items. We can't deny that higher profits generally leave us optimistic, but we'd prefer it if the profit were to be sustainable. We ran the numbers on most publicly listed companies worldwide, and it's very common for unusual items to be once-off in nature. And that's as you'd expect, given these boosts are described as 'unusual'. If Sichuan Zhongguang Lightning Protection Technologies 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 Sichuan Zhongguang Lightning Protection Technologies.

An Unusual Tax Situation

Just as we noted the unusual items, we must inform you that Sichuan Zhongguang Lightning Protection Technologies received a tax benefit which contributed CN¥4.6m to the bottom line. This is of course a bit out of the ordinary, given it is more common for companies to be paying tax than receiving tax benefits! The receipt of a tax benefit is obviously a good thing, on its own. 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 Sichuan Zhongguang Lightning Protection Technologies' Profit Performance

In the last year Sichuan Zhongguang Lightning Protection Technologies received a tax benefit, which boosted its profit in a way that might not be much more sustainable than turning prime farmland into gas fields. 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. For the reasons mentioned above, we think that a perfunctory glance at Sichuan Zhongguang Lightning Protection Technologies' 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 Sichuan Zhongguang Lightning Protection Technologies at this point in time. Every company has risks, and we've spotted 3 warning signs for Sichuan Zhongguang Lightning Protection Technologies (of which 1 makes us a bit uncomfortable!) you should know about.

Our examination of Sichuan Zhongguang Lightning Protection Technologies 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 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. 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.