Last week's profit announcement from Shenzhen Zhilai Sci and Tech Co., Ltd. (SZSE:300771) was underwhelming for investors, despite headline numbers being robust. We did some digging and found some worrying underlying problems.

How Do Unusual Items Influence Profit?

To properly understand Shenzhen Zhilai Sci and Tech's profit results, we need to consider the CN¥20m gain attributed to unusual items. While it's always nice to have higher profit, a large contribution from unusual items sometimes dampens our enthusiasm. 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. We can see that Shenzhen Zhilai Sci and Tech's positive unusual items were quite significant relative to its profit in the year to September 2024. As a result, we can surmise that the unusual items are making its statutory profit significantly stronger than it would otherwise be.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Shenzhen Zhilai Sci and Tech.

Our Take On Shenzhen Zhilai Sci and Tech's Profit Performance

As we discussed above, we think the significant positive unusual item makes Shenzhen Zhilai Sci and Tech's earnings a poor guide to its underlying profitability. For this reason, we think that Shenzhen Zhilai Sci and Tech's statutory profits may be a bad guide to its underlying earnings power, and might give investors an overly positive impression of the company. On the bright side, the company showed enough improvement to book a profit this year, after losing money 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. In light of this, if you'd like to do more analysis on the company, it's vital to be informed of the risks involved. To that end, you should learn about the 3 warning signs we've spotted with Shenzhen Zhilai Sci and Tech (including 1 which shouldn't be ignored).

This note has only looked at a single factor that sheds light on the nature of Shenzhen Zhilai Sci and Tech'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.