A lackluster earnings announcement from Wuxi Xinan Technology Co., Ltd. (SZSE:301170) last week didn't sink the stock price. We think that investors are worried about some weaknesses underlying the earnings.

How Do Unusual Items Influence Profit?

For anyone who wants to understand Wuxi Xinan Technology's profit beyond the statutory numbers, it's important to note that during the last twelve months statutory profit gained from CN¥7.5m worth of unusual items. While it's always nice to have higher profit, a large contribution from unusual items sometimes dampens our enthusiasm. When we crunched the numbers on thousands of publicly listed companies, we found that a boost from unusual items in a given year is often not repeated the next year. And that's as you'd expect, given these boosts are described as 'unusual'. 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 Wuxi Xinan Technology.

Our Take On Wuxi Xinan Technology's Profit Performance

We'd posit that Wuxi Xinan Technology's statutory earnings aren't a clean read on ongoing productivity, due to the large unusual item. Because of this, we think that it may be that Wuxi Xinan Technology's statutory profits are better than its underlying earnings power. Sadly, its EPS was down over the last twelve months. At the end of the day, it's essential to consider more than just the factors above, if you want to understand the company properly. So while earnings quality is important, it's equally important to consider the risks facing Wuxi Xinan Technology at this point in time. To that end, you should learn about the 3 warning signs we've spotted with Wuxi Xinan Technology (including 1 which is significant).

Today we've zoomed in on a single data point to better understand the nature of Wuxi Xinan Technology'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.