The market rallied behind Shanghai Shen Lian Biomedical Corporation's (SHSE:688098) stock, leading do a rise in the share price after its recent weak earnings report. Sometimes, shareholders are willing to ignore soft numbers with the hope that they will improve, but our analysis suggests this is unlikely for Shanghai Shen Lian Biomedical.

The Impact Of Unusual Items On Profit

For anyone who wants to understand Shanghai Shen Lian Biomedical's profit beyond the statutory numbers, it's important to note that during the last twelve months statutory profit gained from CN¥1.6m worth of unusual items. We can't deny that higher profits generally leave us optimistic, but we'd prefer it if the profit were to be sustainable. We ran the numbers on most publicly listed companies worldwide, and it's very common for unusual items to be once-off in nature. Which is hardly surprising, given the name. Assuming those unusual items don't show up again in the current year, we'd thus expect profit to be weaker next year (in the absence of business growth, that is).

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Shanghai Shen Lian Biomedical.

Our Take On Shanghai Shen Lian Biomedical's Profit Performance

Arguably, Shanghai Shen Lian Biomedical's statutory earnings have been distorted by unusual items boosting profit. Therefore, it seems possible to us that Shanghai Shen Lian Biomedical's true underlying earnings power is actually less than its statutory profit. Sadly, its EPS was down over the last twelve months. 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. So while earnings quality is important, it's equally important to consider the risks facing Shanghai Shen Lian Biomedical at this point in time. To that end, you should learn about the 3 warning signs we've spotted with Shanghai Shen Lian Biomedical (including 2 which don't sit too well with us).

This note has only looked at a single factor that sheds light on the nature of Shanghai Shen Lian Biomedical'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. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.

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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.