Even though Dongguan Huali Industries Co.,Ltd (SHSE:603038 ) posted strong earnings, investors appeared to be underwhelmed. We did some digging and actually think they are being unnecessarily pessimistic.

The Impact Of Unusual Items On Profit

To properly understand Dongguan Huali IndustriesLtd's profit results, we need to consider the CN¥15m expense attributed to unusual items. While deductions due to unusual items are disappointing in the first instance, there is a silver lining. We looked at thousands of listed companies and found that unusual items are very often one-off in nature. And, after all, that's exactly what the accounting terminology implies. If Dongguan Huali IndustriesLtd 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 Dongguan Huali IndustriesLtd.

Our Take On Dongguan Huali IndustriesLtd's Profit Performance

Unusual items (expenses) detracted from Dongguan Huali IndustriesLtd's earnings over the last year, but we might see an improvement next year. Based on this observation, we consider it likely that Dongguan Huali IndustriesLtd's statutory profit actually understates its earnings potential! And the EPS is up 80% over the last twelve months. At the end of the day, it's essential to consider more than just the factors above, if you want to understand the company properly. If you want to do dive deeper into Dongguan Huali IndustriesLtd, you'd also look into what risks it is currently facing. Every company has risks, and we've spotted 3 warning signs for Dongguan Huali IndustriesLtd (of which 1 can't be ignored!) you should know about.

Today we've zoomed in on a single data point to better understand the nature of Dongguan Huali IndustriesLtd's profit. But there is always more to discover if you are capable of focussing your mind on minutiae. 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. 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.