Soft earnings didn't appear to concern Anhui Liuguo Chemical Co., Ltd.'s (SHSE:600470) shareholders over the last week. We did some digging, and we believe the earnings are stronger than they seem.

How Do Unusual Items Influence Profit?

For anyone who wants to understand Anhui Liuguo Chemical's profit beyond the statutory numbers, it's important to note that during the last twelve months statutory profit was reduced by CN¥15m due to unusual items. While deductions due to unusual items are disappointing in the first instance, there is a silver lining. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. And, after all, that's exactly what the accounting terminology implies. Assuming those unusual expenses don't come up again, we'd therefore expect Anhui Liuguo Chemical 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 Anhui Liuguo Chemical.

Our Take On Anhui Liuguo Chemical's Profit Performance

Because unusual items detracted from Anhui Liuguo Chemical's earnings over the last year, you could argue that we can expect an improved result in the current quarter. Because of this, we think Anhui Liuguo Chemical'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. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. While conducting our analysis, we found that Anhui Liuguo Chemical has 2 warning signs and it would be unwise to ignore these.

Today we've zoomed in on a single data point to better understand the nature of Anhui Liuguo Chemical'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. 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.

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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.