Solid profit numbers didn't seem to be enough to please Jiangsu chunlan refrigerating equipment stock co.,ltd.'s (SHSE:600854) shareholders. Our analysis suggests they may be concerned about some underlying details.

The Power Of Non-Operating Revenue

Most companies divide classify their revenue as either 'operating revenue', which comes from normal operations, and other revenue, which could include government grants, for example. Where possible, we prefer rely on operating revenue to get a better understanding of how the business is functioning. Importantly, the non-operating revenue often comes without associated ongoing costs, so it can boost profit by letting it fall straight to the bottom line, making the operating business seem better than it really is. It's worth noting that Jiangsu chunlan refrigerating equipment stockltd saw a big increase in non-operating revenue as a proportion of total revenue over the last year. Indeed, this proportion rose from 33% last year to 45% this year. The high levels of non-operating revenue are problematic because if (and when) they do not repeat, then overall revenue (and profitability) of the firm will fall. Sometimes, you can get a better idea of the underlying earnings potential of a company by excluding unusual boosts to non-operating revenue.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Jiangsu chunlan refrigerating equipment stockltd.

The Impact Of Unusual Items On Profit

As well as that spike in non-operating revenue, we should also consider the CN¥3.1m boost to profit coming from unusual items, over the last year. We can't deny that higher profits generally leave us optimistic, but we'd prefer it if the profit were to be sustainable. 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 that's as you'd expect, given these boosts are described as 'unusual'. If Jiangsu chunlan refrigerating equipment stockltd doesn't see that contribution repeat, then all else being equal we'd expect its profit to drop over the current year.

Our Take On Jiangsu chunlan refrigerating equipment stockltd's Profit Performance

In the last year Jiangsu chunlan refrigerating equipment stockltd's non-operating revenue really gave it a boost, but not in a way that is necessarily going to be sustained. 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 and everything else is equal. For the reasons mentioned above, we think that a perfunctory glance at Jiangsu chunlan refrigerating equipment stockltd's statutory profits might make it look better than it really is on an underlying level. If you want to do dive deeper into Jiangsu chunlan refrigerating equipment stockltd, you'd also look into what risks it is currently facing. While conducting our analysis, we found that Jiangsu chunlan refrigerating equipment stockltd has 1 warning sign and it would be unwise to ignore it.

Our examination of Jiangsu chunlan refrigerating equipment stockltd 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.