The subdued stock price reaction suggests that Shanghai Phoenix Enterprise (Group) Co., Ltd.'s (SHSE:600679) strong earnings didn't offer any surprises. We think that investors have missed some encouraging factors underlying the profit figures.

How Do Unusual Items Influence Profit?

To properly understand Shanghai Phoenix Enterprise (Group)'s profit results, we need to consider the CN¥8.3m expense attributed to unusual items. 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. If Shanghai Phoenix Enterprise (Group) 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 Shanghai Phoenix Enterprise (Group).

Our Take On Shanghai Phoenix Enterprise (Group)'s Profit Performance

Unusual items (expenses) detracted from Shanghai Phoenix Enterprise (Group)'s earnings over the last year, but we might see an improvement next year. Based on this observation, we consider it likely that Shanghai Phoenix Enterprise (Group)'s statutory profit actually understates its earnings potential! And one can definitely find a positive in the fact that it made a profit this year, despite losing money last year. 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 Shanghai Phoenix Enterprise (Group) at this point in time. You'd be interested to know, that we found 1 warning sign for Shanghai Phoenix Enterprise (Group) and you'll want to know about it.

Today we've zoomed in on a single data point to better understand the nature of Shanghai Phoenix Enterprise (Group)'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.