The market seemed underwhelmed by last week's earnings announcement from Hongda High-Tech Holding Co.,Ltd. (SZSE:002144) despite the healthy numbers. We did some analysis to find out why and believe that investors might be missing some encouraging factors contained in the earnings.

How Do Unusual Items Influence Profit?

Importantly, our data indicates that Hongda High-Tech HoldingLtd's profit was reduced by CN¥20m, due to unusual items, over the last year. 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, after all, that's exactly what the accounting terminology implies. Assuming those unusual expenses don't come up again, we'd therefore expect Hongda High-Tech HoldingLtd 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 Hongda High-Tech HoldingLtd.

Our Take On Hongda High-Tech HoldingLtd's Profit Performance

Unusual items (expenses) detracted from Hongda High-Tech HoldingLtd's earnings over the last year, but we might see an improvement next year. Because of this, we think Hongda High-Tech HoldingLtd's earnings potential is at least as good as it seems, and maybe even better! 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 Hongda High-Tech HoldingLtd at this point in time. For instance, we've identified 2 warning signs for Hongda High-Tech HoldingLtd (1 is concerning) you should be familiar with.

Today we've zoomed in on a single data point to better understand the nature of Hongda High-Tech HoldingLtd's profit. But there is always more to discover if you are capable of focussing your mind on minutiae. 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.