The market wasn't impressed with the soft earnings from Zhejiang Taitan Co.,Ltd. (SZSE:003036) recently. We did some further digging and think they have a few more reasons to be concerned beyond the statutory profit.

The Impact Of Unusual Items On Profit

To properly understand Zhejiang TaitanLtd's profit results, we need to consider the CN¥19m gain attributed to 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. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. And, after all, that's exactly what the accounting terminology implies. If Zhejiang TaitanLtd 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 Zhejiang TaitanLtd.

Our Take On Zhejiang TaitanLtd's Profit Performance

Arguably, Zhejiang TaitanLtd's statutory earnings have been distorted by unusual items boosting profit. Because of this, we think that it may be that Zhejiang TaitanLtd's statutory profits are better than its underlying earnings power. Nonetheless, it's still worth noting that its earnings per share have grown at 35% over the last three years. Of course, we've only just scratched the surface when it comes to analysing its earnings; one could also consider margins, forecast growth, and return on investment, among other factors. So if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. Every company has risks, and we've spotted 3 warning signs for Zhejiang TaitanLtd (of which 1 is concerning!) you should know about.

Today we've zoomed in on a single data point to better understand the nature of Zhejiang TaitanLtd's profit. 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 with high insider ownership.

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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.