Hangzhou First Applied Material Co., Ltd.'s (SHSE:603806) stock was strong after they recently reported robust earnings. However, we think that shareholders may be missing some concerning details in the numbers.

How Do Unusual Items Influence Profit?

To properly understand Hangzhou First Applied Material's profit results, we need to consider the CN¥276m gain attributed to unusual items. 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 that's as you'd expect, given these boosts are described as 'unusual'. Assuming those unusual items don't show up again in the current year, we'd thus expect profit to be weaker next year (in the absence of business growth, that is).

That might leave you wondering what analysts are forecasting in terms of future profitability. Luckily, you can click here to see an interactive graph depicting future profitability, based on their estimates.

Our Take On Hangzhou First Applied Material's Profit Performance

Arguably, Hangzhou First Applied Material's statutory earnings have been distorted by unusual items boosting profit. Because of this, we think that it may be that Hangzhou First Applied Material's statutory profits are better than its underlying earnings power. But at least holders can take some solace from the 22% EPS growth in 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 Hangzhou First Applied Material at this point in time. At Simply Wall St, we found 1 warning sign for Hangzhou First Applied Material and we think they deserve your attention.

This note has only looked at a single factor that sheds light on the nature of Hangzhou First Applied Material'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.