Guanghui Energy Co., Ltd.'s (SHSE:600256) stock was strong despite it releasing a soft earnings report last week. However, we think the company is showing some signs that things are more promising than they seem.

How Do Unusual Items Influence Profit?

Importantly, our data indicates that Guanghui Energy's profit was reduced by CN¥895m, due to unusual items, over the last year. It's never great to see unusual items costing the company profits, but on the upside, things might improve sooner rather than later. 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. If Guanghui Energy doesn't see those unusual expenses repeat, then all else being equal we'd expect its profit to increase over the coming year.

That might leave you wondering what analysts are forecasting in terms of future profitability. Luckily, you can click here to see an interactive graph depicting future profitability, based on their estimates.

Our Take On Guanghui Energy's Profit Performance

Unusual items (expenses) detracted from Guanghui Energy's earnings over the last year, but we might see an improvement next year. Based on this observation, we consider it likely that Guanghui Energy's statutory profit actually understates its earnings potential! And on top of that, its earnings per share have grown at 23% per year over the last three years. 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 while earnings quality is important, it's equally important to consider the risks facing Guanghui Energy at this point in time. To that end, you should learn about the 4 warning signs we've spotted with Guanghui Energy (including 1 which is a bit unpleasant).

This note has only looked at a single factor that sheds light on the nature of Guanghui Energy's profit. 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. 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.