Despite posting strong earnings, Shandong Dongyue Organosilicon Materials Co., Ltd.'s (SZSE:300821) stock didn't move much over the last week. We looked deeper into the numbers and found that shareholders might be concerned with some underlying weaknesses.

How Do Unusual Items Influence Profit?

Importantly, our data indicates that Shandong Dongyue Organosilicon Materials' profit received a boost of CN¥11m in unusual items, over the last year. 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 crunched the numbers on thousands of publicly listed companies, we found that a boost from unusual items in a given year is often not repeated the next year. And, after all, that's exactly what the accounting terminology implies. We can see that Shandong Dongyue Organosilicon Materials' positive unusual items were quite significant relative to its profit in the year to September 2024. As a result, we can surmise that the unusual items are making its statutory profit significantly stronger 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 Shandong Dongyue Organosilicon Materials.

An Unusual Tax Situation

Having already discussed the impact of the unusual items, we should also note that Shandong Dongyue Organosilicon Materials received a tax benefit of CN¥33m. 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! We're sure the company was pleased with its tax benefit. And given that it lost money last year, it seems possible that the benefit is evidence that it now expects to find value in its past tax losses. 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. While we think it's good that the company has booked a tax benefit, it does mean that there's every chance the statutory profit will come in a lot higher than it would be if the income was adjusted for one-off factors.

Our Take On Shandong Dongyue Organosilicon Materials' Profit Performance

In the last year Shandong Dongyue Organosilicon Materials 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. Furthermore, it also benefitted from a positive unusual item, which boosted the profit result even higher. Considering all this we'd argue Shandong Dongyue Organosilicon Materials' profits probably give an overly generous impression of its sustainable level of profitability. If you'd like to know more about Shandong Dongyue Organosilicon Materials as a business, it's important to be aware of any risks it's facing. For example, we've discovered 1 warning sign that you should run your eye over to get a better picture of Shandong Dongyue Organosilicon Materials.

Our examination of Shandong Dongyue Organosilicon Materials 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. 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 with significant insider holdings 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.