A lackluster earnings announcement from Zhejiang Wanfeng Chemical Co.,Ltd. (SHSE:603172) last week didn't sink the stock price. We think that investors are worried about some weaknesses underlying the earnings.

The Impact Of Unusual Items On Profit

To properly understand Zhejiang Wanfeng ChemicalLtd's profit results, we need to consider the CN¥5.6m gain attributed to unusual items. 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 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. 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 Zhejiang Wanfeng ChemicalLtd.

Our Take On Zhejiang Wanfeng ChemicalLtd's Profit Performance

Arguably, Zhejiang Wanfeng ChemicalLtd's statutory earnings have been distorted by unusual items boosting profit. Therefore, it seems possible to us that Zhejiang Wanfeng ChemicalLtd's true underlying earnings power is actually less than its statutory profit. Sadly, its EPS was down 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. In light of this, if you'd like to do more analysis on the company, it's vital to be informed of the risks involved. For example, Zhejiang Wanfeng ChemicalLtd has 2 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.

This note has only looked at a single factor that sheds light on the nature of Zhejiang Wanfeng ChemicalLtd's profit. But there is always more to discover if you are capable of focussing your mind on minutiae. 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 with high insider ownership.

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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.