The subdued market reaction suggests that LanZhou Foci Pharmaceutical Co.,Ltd.'s (SZSE:002644) recent earnings didn't contain any surprises. We think that investors are worried about some weaknesses underlying the earnings.

The Impact Of Unusual Items On Profit

For anyone who wants to understand LanZhou Foci PharmaceuticalLtd's profit beyond the statutory numbers, it's important to note that during the last twelve months statutory profit gained from CN¥7.0m worth of unusual items. While it's always nice to have higher profit, a large contribution from unusual items sometimes dampens our enthusiasm. When we crunched the numbers on thousands of publicly listed companies, we found that a boost from unusual items in a given year is often not repeated the next year. And that's as you'd expect, given these boosts are described as 'unusual'. If LanZhou Foci PharmaceuticalLtd doesn't see that contribution repeat, then all else being equal we'd expect its profit to drop over the current year.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of LanZhou Foci PharmaceuticalLtd.

Our Take On LanZhou Foci PharmaceuticalLtd's Profit Performance

We'd posit that LanZhou Foci PharmaceuticalLtd's statutory earnings aren't a clean read on ongoing productivity, due to the large unusual item. Therefore, it seems possible to us that LanZhou Foci PharmaceuticalLtd's true underlying earnings power is actually less than its statutory profit. In further bad news, its earnings per share decreased in the 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. If you want to do dive deeper into LanZhou Foci PharmaceuticalLtd, you'd also look into what risks it is currently facing. For example, LanZhou Foci PharmaceuticalLtd has 2 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

This note has only looked at a single factor that sheds light on the nature of LanZhou Foci PharmaceuticalLtd'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 with significant insider holdings 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.