Despite posting some strong earnings, the market for Shanghai Yanhua Smartech Group Co., Ltd.'s (SZSE:002178) stock hasn't moved much. We did some digging, and we found some concerning factors in the details.

The Impact Of Unusual Items On Profit

Importantly, our data indicates that Shanghai Yanhua Smartech Group's profit received a boost of CN¥23m in unusual items, over the last year. 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. Shanghai Yanhua Smartech Group had a rather significant contribution from unusual items relative to its profit to March 2024. All else being equal, this would likely have the effect of making the statutory profit a poor guide to underlying earnings power.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Shanghai Yanhua Smartech Group.

Our Take On Shanghai Yanhua Smartech Group's Profit Performance

As we discussed above, we think the significant positive unusual item makes Shanghai Yanhua Smartech Group's earnings a poor guide to its underlying profitability. As a result, we think it may well be the case that Shanghai Yanhua Smartech Group's underlying earnings power is lower than its statutory profit. The good news is that it earned a profit in the last twelve months, despite its previous loss. 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 Shanghai Yanhua Smartech Group at this point in time. Every company has risks, and we've spotted 1 warning sign for Shanghai Yanhua Smartech Group you should know about.

This note has only looked at a single factor that sheds light on the nature of Shanghai Yanhua Smartech Group's profit. 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.

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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.