The stock was sluggish on the back of Nanjing Xinlian Electronics Co., Ltd's (SZSE:002546) recent earnings report. Along with the solid headline numbers, we think that investors have some reasons for optimism.

How Do Unusual Items Influence Profit?

Importantly, our data indicates that Nanjing Xinlian Electronics' profit was reduced by CN¥67m, 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. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. And that's hardly a surprise given these line items are considered unusual. In the twelve months to December 2023, Nanjing Xinlian Electronics had a big unusual items expense. All else being equal, this would likely have the effect of making the statutory profit look worse than its underlying earnings power.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Nanjing Xinlian Electronics.

An Unusual Tax Situation

Just as we noted the unusual items, we must inform you that Nanjing Xinlian Electronics received a tax benefit which contributed CN¥11m 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! The receipt of a tax benefit is obviously a good thing, on its own. 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. Assuming the tax benefit is not repeated every year, we could see its profitability drop noticeably, all else being equal.

Our Take On Nanjing Xinlian Electronics' Profit Performance

In its last report Nanjing Xinlian Electronics received a tax benefit which might make its profit look better than it really is on a underlying level. Having said that, it also had a unusual item reducing its profit. Based on these factors, we think that Nanjing Xinlian Electronics' profits are a reasonably conservative guide to its underlying profitability. So while earnings quality is important, it's equally important to consider the risks facing Nanjing Xinlian Electronics at this point in time. Case in point: We've spotted 3 warning signs for Nanjing Xinlian Electronics you should be mindful of and 2 of these bad boys shouldn't be ignored.

Our examination of Nanjing Xinlian Electronics has focussed on certain factors that can make its earnings look better than they are. 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 that insiders are buying to be useful.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.