The most recent earnings report from Nanxing Machinery Co., Ltd. (SZSE:002757) was disappointing for shareholders. Despite the soft profit numbers, our analysis has optimistic about the overall quality of the income statement.

The Impact Of Unusual Items On Profit

Importantly, our data indicates that Nanxing Machinery's profit was reduced by CN¥107m, due to unusual items, over the last year. It's never great to see unusual items costing the company profits, but on the upside, things might improve sooner rather than later. We looked at thousands of listed companies and found that unusual items are very often one-off in nature. And, after all, that's exactly what the accounting terminology implies. Assuming those unusual expenses don't come up again, we'd therefore expect Nanxing Machinery to produce a higher profit next year, all else being equal.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Nanxing Machinery.

Our Take On Nanxing Machinery's Profit Performance

Unusual items (expenses) detracted from Nanxing Machinery's earnings over the last year, but we might see an improvement next year. Because of this, we think Nanxing Machinery's earnings potential is at least as good as it seems, and maybe even better! Unfortunately, though, its earnings per share actually fell back over the last year. The goal of this article has been to assess how well we can rely on the statutory earnings to reflect the company's potential, but there is plenty more to consider. So while earnings quality is important, it's equally important to consider the risks facing Nanxing Machinery at this point in time. Case in point: We've spotted 4 warning signs for Nanxing Machinery you should be mindful of and 1 of them is potentially serious.

Today we've zoomed in on a single data point to better understand the nature of Nanxing Machinery'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 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.