Despite posting healthy earnings, Xiwang Foodstuffs Co.,Ltd.'s (SZSE:000639 ) stock has been quite weak. Along with the solid headline numbers, we think that investors have some reasons for optimism.

The Impact Of Unusual Items On Profit

For anyone who wants to understand Xiwang FoodstuffsLtd's profit beyond the statutory numbers, it's important to note that during the last twelve months statutory profit was reduced by CN¥87m due to unusual items. It's never great to see unusual items costing the company profits, but on the upside, things might improve sooner rather than later. We looked at thousands of listed companies and found that unusual items are very often one-off in nature. And, after all, that's exactly what the accounting terminology implies. If Xiwang FoodstuffsLtd doesn't see those unusual expenses repeat, then all else being equal we'd expect its profit to increase over the coming year.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Xiwang FoodstuffsLtd.

An Unusual Tax Situation

Having already discussed the impact of the unusual items, we should also note that Xiwang FoodstuffsLtd received a tax benefit of CN¥18m. This is of course a bit out of the ordinary, given it is more common for companies to be paying tax than receiving tax benefits! Of course, prima facie it's great to receive a tax benefit. And given that it lost money last year, it seems possible that the benefit is evidence that it now expects to find value in its past tax losses. 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 Xiwang FoodstuffsLtd's Profit Performance

In its last report Xiwang FoodstuffsLtd received a tax benefit which might make its profit look better than it really is on a underlying level. But on the other hand, it also saw an unusual item depress its profit. Considering all the aforementioned, we'd venture that Xiwang FoodstuffsLtd's profit result is a pretty good guide to its true profitability, albeit a bit on the conservative side. If you'd like to know more about Xiwang FoodstuffsLtd as a business, it's important to be aware of any risks it's facing. Case in point: We've spotted 2 warning signs for Xiwang FoodstuffsLtd you should be mindful of and 1 of them is concerning.

In this article we've looked at a number of factors that can impair the utility of profit numbers, as a guide to a business. 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. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.