Shenzhen Topway Video Communication Co., Ltd (SZSE:002238) recently posted soft earnings but shareholders didn't react strongly. We did some analysis and found some concerning details beneath the statutory profit number.

How Do Unusual Items Influence Profit?

Importantly, our data indicates that Shenzhen Topway Video Communication's profit received a boost of CN¥55m 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. Shenzhen Topway Video Communication had a rather significant contribution from unusual items relative to its profit to March 2024. All else being equal, this would likely have the effect of making the statutory profit a poor guide to underlying earnings power.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Shenzhen Topway Video Communication.

An Unusual Tax Situation

Having already discussed the impact of the unusual items, we should also note that Shenzhen Topway Video Communication received a tax benefit of CN¥9.0m. 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. However, our data indicates that tax benefits can temporarily boost statutory profit in the year it is booked, but subsequently profit may fall back. In the likely event the tax benefit is not repeated, we'd expect to see its statutory profit levels drop, at least in the absence of strong growth. So while we think it's great to receive a tax benefit, it does tend to imply an increased risk that the statutory profit overstates the sustainable earnings power of the business.

Our Take On Shenzhen Topway Video Communication's Profit Performance

In its last report Shenzhen Topway Video Communication received a tax benefit which might make its profit look better than it really is on a underlying level. 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. Considering all this we'd argue Shenzhen Topway Video Communication's profits probably give an overly generous impression of its sustainable level of profitability. If you want to do dive deeper into Shenzhen Topway Video Communication, you'd also look into what risks it is currently facing. For example, Shenzhen Topway Video Communication has 3 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

Our examination of Shenzhen Topway Video Communication 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 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. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.

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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.