The subdued market reaction suggests that Zhengyuan Zhihui Group Co.,Ltd.'s (SZSE:300645) recent earnings didn't contain any surprises. Our analysis suggests that along with soft profit numbers, investors should be aware of some other underlying weaknesses in the numbers.

How Do Unusual Items Influence Profit?

To properly understand Zhengyuan Zhihui GroupLtd's profit results, we need to consider the CN¥15m expense attributed to unusual items. It's never great to see unusual items costing the company profits, but on the upside, things might improve sooner rather than later. We looked at thousands of listed companies and found that unusual items are very often one-off in nature. And that's hardly a surprise given these line items are considered unusual. If Zhengyuan Zhihui GroupLtd doesn't see those unusual expenses repeat, then all else being equal we'd expect its profit to increase over the coming year.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Zhengyuan Zhihui GroupLtd.

An Unusual Tax Situation

Just as we noted the unusual items, we must inform you that Zhengyuan Zhihui GroupLtd received a tax benefit which contributed CN¥15m to the bottom line. This is meaningful because companies usually pay tax rather than receive tax benefits. We're sure the company was pleased with its tax benefit. However, our data indicates that tax benefits can temporarily boost statutory profit in the year it is booked, but subsequently profit may fall back. 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 Zhengyuan Zhihui GroupLtd's Profit Performance

In its last report Zhengyuan Zhihui GroupLtd received a tax benefit which might make its profit look better than it really is on a underlying level. Having said that, it also had a unusual item reducing its profit. Based on these factors, it's hard to tell if Zhengyuan Zhihui GroupLtd's profits are a reasonable reflection of its underlying profitability. If you want to do dive deeper into Zhengyuan Zhihui GroupLtd, you'd also look into what risks it is currently facing. For example, we've found that Zhengyuan Zhihui GroupLtd has 4 warning signs (1 is a bit unpleasant!) that deserve your attention before going any further with your analysis.

Our examination of Zhengyuan Zhihui GroupLtd has focussed on certain factors that can make its earnings look better than they are. 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.