Despite posting some strong earnings, the market for WPG (Shanghai) Smart Water Public Co.,Ltd.'s (SHSE:603956) stock hasn't moved much. Our analysis suggests that shareholders have noticed something concerning in the numbers.

The Impact Of Unusual Items On Profit

Importantly, our data indicates that WPG (Shanghai) Smart Water PublicLtd's profit received a boost of CN¥17m in 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 analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. Which is hardly surprising, given the name. WPG (Shanghai) Smart Water PublicLtd 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 WPG (Shanghai) Smart Water PublicLtd.

An Unusual Tax Situation

Just as we noted the unusual items, we must inform you that WPG (Shanghai) Smart Water PublicLtd received a tax benefit which contributed CN¥6.0m to the bottom line. 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. And given that it lost money last year, it seems possible that the benefit is evidence that it now expects to find value in its past tax losses. However, the devil in the detail is that these kind of benefits only impact in the year they are booked, and are often one-off in nature. 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.

Our Take On WPG (Shanghai) Smart Water PublicLtd's Profit Performance

In its last report WPG (Shanghai) Smart Water PublicLtd 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. For the reasons mentioned above, we think that a perfunctory glance at WPG (Shanghai) Smart Water PublicLtd's statutory profits might make it look better than it really is on an underlying level. If you'd like to know more about WPG (Shanghai) Smart Water PublicLtd as a business, it's important to be aware of any risks it's facing. To help with this, we've discovered 3 warning signs (2 can't be ignored!) that you ought to be aware of before buying any shares in WPG (Shanghai) Smart Water PublicLtd.

Our examination of WPG (Shanghai) Smart Water PublicLtd 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. 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.