The subdued stock price reaction suggests that Zhejiang Founder Motor Co., Ltd.'s (SZSE:002196) strong earnings didn't offer any surprises. We think that investors have missed some encouraging factors underlying the profit figures.

How Do Unusual Items Influence Profit?

Importantly, our data indicates that Zhejiang Founder Motor's profit was reduced by CN¥34m, 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 that's hardly a surprise given these line items are considered unusual. Assuming those unusual expenses don't come up again, we'd therefore expect Zhejiang Founder Motor 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 Zhejiang Founder Motor.

Our Take On Zhejiang Founder Motor's Profit Performance

Because unusual items detracted from Zhejiang Founder Motor's earnings over the last year, you could argue that we can expect an improved result in the current quarter. Based on this observation, we consider it likely that Zhejiang Founder Motor's statutory profit actually understates its earnings potential! And one can definitely find a positive in the fact that it made a profit this year, despite losing money last year. Of course, we've only just scratched the surface when it comes to analysing its earnings; one could also consider margins, forecast growth, and return on investment, among other factors. So while earnings quality is important, it's equally important to consider the risks facing Zhejiang Founder Motor at this point in time. Case in point: We've spotted 2 warning signs for Zhejiang Founder Motor you should be aware of.

Today we've zoomed in on a single data point to better understand the nature of Zhejiang Founder Motor'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. 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.