Guangzhou LBP Medicine Science & Technology Co., Ltd. (SHSE:688393) recently posted soft earnings but shareholders didn't react strongly. We did some digging, and we believe that investors are missing some worrying factors underlying the profit figures.

How Do Unusual Items Influence Profit?

To properly understand Guangzhou LBP Medicine Science & Technology's profit results, we need to consider the CN¥9.9m 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. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. Which is hardly surprising, given the name. Guangzhou LBP Medicine Science & Technology had a rather significant contribution from unusual items relative to its profit to September 2024. All else being equal, this would likely have the effect of making the statutory profit a poor guide to underlying earnings power.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Guangzhou LBP Medicine Science & Technology.

An Unusual Tax Situation

Just as we noted the unusual items, we must inform you that Guangzhou LBP Medicine Science & Technology received a tax benefit which contributed CN¥9.1m to the bottom line. This is meaningful because companies usually pay tax rather than receive tax benefits. The receipt of a tax benefit is obviously a good thing, on its own. However, our data indicates that tax benefits can temporarily boost statutory profit in the year it is booked, but subsequently profit may fall back. Assuming the tax benefit is not repeated every year, we could see its profitability drop noticeably, all else being equal.

Our Take On Guangzhou LBP Medicine Science & Technology's Profit Performance

In the last year Guangzhou LBP Medicine Science & Technology received a tax benefit, which boosted its profit in a way that might not be much more sustainable than turning prime farmland into gas fields. And on top of that, it also saw an unusual item boost its profit, suggesting that next year might see a lower profit number, if these events are not repeated. For all the reasons mentioned above, we think that, at a glance, Guangzhou LBP Medicine Science & Technology's statutory profits could be considered to be low quality, because they are likely to give investors an overly positive impression of the company. If you'd like to know more about Guangzhou LBP Medicine Science & Technology as a business, it's important to be aware of any risks it's facing. For example, Guangzhou LBP Medicine Science & Technology has 3 warning signs (and 1 which is potentially serious) we think you should know about.

Our examination of Guangzhou LBP Medicine Science & Technology has focussed on certain factors that can make its earnings look better than they are. And, on that basis, we are somewhat skeptical. 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. 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.