Last week's profit announcement from Guangdong Nedfon Air System Co., Ltd. (SZSE:301043) was underwhelming for investors, despite headline numbers being robust. We think that the market might be paying attention to some underlying factors that they find to be concerning.

The Impact Of Unusual Items On Profit

To properly understand Guangdong Nedfon Air System's profit results, we need to consider the CN¥10m gain attributed to unusual items. While it's always nice to have higher profit, a large contribution from unusual items sometimes dampens our enthusiasm. We ran the numbers on most publicly listed companies worldwide, and it's very common for unusual items to be once-off in nature. And that's as you'd expect, given these boosts are described as 'unusual'. If Guangdong Nedfon Air System doesn't see that contribution repeat, then all else being equal we'd expect its profit to drop over the current year.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Guangdong Nedfon Air System.

Our Take On Guangdong Nedfon Air System's Profit Performance

We'd posit that Guangdong Nedfon Air System's statutory earnings aren't a clean read on ongoing productivity, due to the large unusual item. Therefore, it seems possible to us that Guangdong Nedfon Air System's true underlying earnings power is actually less than its statutory profit. But at least holders can take some solace from the 17% per annum growth in EPS for the last three. 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 Guangdong Nedfon Air System at this point in time. You'd be interested to know, that we found 1 warning sign for Guangdong Nedfon Air System and you'll want to know about it.

This note has only looked at a single factor that sheds light on the nature of Guangdong Nedfon Air System's profit. But there are plenty of other ways to inform your opinion of a company. 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.