Jiangsu Lianhuan Pharmaceutical Co., Ltd.'s (SHSE:600513) recent weak earnings report didn't cause a big stock movement. We think that investors are worried about some weaknesses underlying the earnings.

How Do Unusual Items Influence Profit?

Importantly, our data indicates that Jiangsu Lianhuan Pharmaceutical's profit received a boost of CN¥22m in unusual items, over the last year. While it's always nice to have higher profit, a large contribution from unusual items sometimes dampens our enthusiasm. We ran the numbers on most publicly listed companies worldwide, and it's very common for unusual items to be once-off in nature. Which is hardly surprising, given the name. Assuming those unusual items don't show up again in the current year, we'd thus expect profit to be weaker next year (in the absence of business growth, that is).

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Jiangsu Lianhuan Pharmaceutical.

Our Take On Jiangsu Lianhuan Pharmaceutical's Profit Performance

Arguably, Jiangsu Lianhuan Pharmaceutical's statutory earnings have been distorted by unusual items boosting profit. Because of this, we think that it may be that Jiangsu Lianhuan Pharmaceutical's statutory profits are better than its underlying earnings power. But at least holders can take some solace from the 31% per annum growth in EPS for the last three. The goal of this article has been to assess how well we can rely on the statutory earnings to reflect the company's potential, but there is plenty more to consider. So while earnings quality is important, it's equally important to consider the risks facing Jiangsu Lianhuan Pharmaceutical at this point in time. For example, we've discovered 1 warning sign that you should run your eye over to get a better picture of Jiangsu Lianhuan Pharmaceutical.

This note has only looked at a single factor that sheds light on the nature of Jiangsu Lianhuan Pharmaceutical's profit. 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 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.