The market shrugged off HIT Welding Industry Co.,Ltd's (SZSE:301137) solid earnings report. We think that investors might be worried about some concerning underlying factors.

How Do Unusual Items Influence Profit?

Importantly, our data indicates that HIT Welding IndustryLtd's profit received a boost of CN¥23m in unusual items, over the last year. We can't deny that higher profits generally leave us optimistic, but we'd prefer it if the profit were to be sustainable. 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 HIT Welding IndustryLtd's positive unusual items were quite significant relative to its profit in the year to June 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 HIT Welding IndustryLtd.

Our Take On HIT Welding IndustryLtd's Profit Performance

As we discussed above, we think the significant positive unusual item makes HIT Welding IndustryLtd's earnings a poor guide to its underlying profitability. As a result, we think it may well be the case that HIT Welding IndustryLtd's underlying earnings power is lower than its statutory profit. But at least holders can take some solace from the 17% EPS growth in the 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. So if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. For instance, we've identified 3 warning signs for HIT Welding IndustryLtd (1 makes us a bit uncomfortable) you should be familiar with.

Today we've zoomed in on a single data point to better understand the nature of HIT Welding IndustryLtd's profit. 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.

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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.