The subdued stock price reaction suggests that China Sanjiang Fine Chemicals Company Limited's (HKG:2198) strong earnings didn't offer any surprises. Investors are probably missing some underlying factors which are encouraging for the future of the company.

How Do Unusual Items Influence Profit?

To properly understand China Sanjiang Fine Chemicals' profit results, we need to consider the CN¥263m expense attributed 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 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 China Sanjiang Fine Chemicals 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 China Sanjiang Fine Chemicals.

Our Take On China Sanjiang Fine Chemicals' Profit Performance

Because unusual items detracted from China Sanjiang Fine Chemicals' 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 China Sanjiang Fine Chemicals' statutory profit actually understates its earnings potential! And it's also positive that the company showed enough improvement to book a profit this year, after losing money last year. At the end of the day, it's essential to consider more than just the factors above, if you want to understand the company properly. So while earnings quality is important, it's equally important to consider the risks facing China Sanjiang Fine Chemicals at this point in time. To help with this, we've discovered 3 warning signs (2 are potentially serious!) that you ought to be aware of before buying any shares in China Sanjiang Fine Chemicals.

This note has only looked at a single factor that sheds light on the nature of China Sanjiang Fine Chemicals' 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. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks with high insider ownership.

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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.