A lackluster earnings announcement from Chu Kong Petroleum and Natural Gas Steel Pipe Holdings Limited (HKG:1938) last week didn't sink the stock price. However, we believe that investors should be aware of some underlying factors which may be of concern.

How Do Unusual Items Influence Profit?

Importantly, our data indicates that Chu Kong Petroleum and Natural Gas Steel Pipe Holdings' profit was reduced by CN¥7.1m, due to unusual items, over the last year. While deductions due to unusual items are disappointing in the first instance, there is a silver lining. 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. Assuming those unusual expenses don't come up again, we'd therefore expect Chu Kong Petroleum and Natural Gas Steel Pipe Holdings to produce a higher profit next year, all else being equal.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Chu Kong Petroleum and Natural Gas Steel Pipe Holdings.

An Unusual Tax Situation

Having already discussed the impact of the unusual items, we should also note that Chu Kong Petroleum and Natural Gas Steel Pipe Holdings received a tax benefit of CN¥184m. It's always a bit noteworthy when a company is paid by the tax man, rather than paying the tax man. We're sure the company was pleased with its tax benefit. However, the devil in the detail is that these kind of benefits only impact in the year they are booked, and are often one-off in nature. In the likely event the tax benefit is not repeated, we'd expect to see its statutory profit levels drop, at least in the absence of strong growth.

Our Take On Chu Kong Petroleum and Natural Gas Steel Pipe Holdings' Profit Performance

In its last report Chu Kong Petroleum and Natural Gas Steel Pipe Holdings 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. Having considered these factors, we don't think Chu Kong Petroleum and Natural Gas Steel Pipe Holdings' statutory profits give an overly harsh view of the business. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. For example, we've found that Chu Kong Petroleum and Natural Gas Steel Pipe Holdings has 3 warning signs (1 is a bit unpleasant!) that deserve your attention before going any further with your analysis.

Our examination of Chu Kong Petroleum and Natural Gas Steel Pipe Holdings has focussed on certain factors that can make its earnings look better than they are. 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. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks with high insider ownership.

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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.