Despite announcing strong earnings, YanTai LongYuan Power Technology Co., Ltd.'s (SZSE:300105) stock was sluggish. We did some digging and found some worrying underlying problems.

The Impact Of Unusual Items On Profit

To properly understand YanTai LongYuan Power Technology's profit results, we need to consider the CN¥15m 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 YanTai LongYuan Power Technology.

An Unusual Tax Situation

Having already discussed the impact of the unusual items, we should also note that YanTai LongYuan Power Technology received a tax benefit of CN¥20m. 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! The receipt of a tax benefit is obviously a good thing, on its own. 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 YanTai LongYuan Power Technology's Profit Performance

In its last report YanTai LongYuan Power Technology 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 YanTai LongYuan Power Technology's statutory profits might make it look better than it really is on an underlying level. If you want to do dive deeper into YanTai LongYuan Power Technology, you'd also look into what risks it is currently facing. In terms of investment risks, we've identified 1 warning sign with YanTai LongYuan Power Technology, and understanding it should be part of your investment process.

Our examination of YanTai LongYuan Power Technology 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. 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 with significant insider holdings 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.