Shenzhen Guangju Energy Co., Ltd. (SZSE:000096) announced strong profits, but the stock was stagnant. Our analysis suggests that this might be because shareholders have noticed some concerning underlying factors.

The Impact Of Unusual Items On Profit

To properly understand Shenzhen Guangju Energy's profit results, we need to consider the CN¥6.4m gain attributed to unusual items. While we like to see profit increases, we tend to be a little more cautious when unusual items have made a big contribution. We ran the numbers on most publicly listed companies worldwide, and it's very common for unusual items to be once-off in nature. And, after all, that's exactly what the accounting terminology implies. 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 Shenzhen Guangju Energy.

Our Take On Shenzhen Guangju Energy's Profit Performance

Arguably, Shenzhen Guangju Energy's statutory earnings have been distorted by unusual items boosting profit. Therefore, it seems possible to us that Shenzhen Guangju Energy's true underlying earnings power is actually less than its statutory profit. But at least holders can take some solace from the 53% EPS growth in the last year. Of course, we've only just scratched the surface when it comes to analysing its earnings; one could also consider margins, forecast growth, and return on investment, among other factors. So while earnings quality is important, it's equally important to consider the risks facing Shenzhen Guangju Energy 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 Shenzhen Guangju Energy.

Today we've zoomed in on a single data point to better understand the nature of Shenzhen Guangju Energy'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. 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.