The most recent earnings report from Renhe Pharmacy Co.,Ltd (SZSE:000650) was disappointing for shareholders. Despite the soft profit numbers, our analysis has optimistic about the overall quality of the income statement.

The Impact Of Unusual Items On Profit

To properly understand Renhe PharmacyLtd's profit results, we need to consider the CN¥130m expense attributed to unusual items. While deductions due to unusual items are disappointing in the first instance, there is a silver lining. We looked at thousands of listed companies and found that unusual items are very often one-off in nature. And that's hardly a surprise given these line items are considered unusual. If Renhe PharmacyLtd 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 Renhe PharmacyLtd.

Our Take On Renhe PharmacyLtd's Profit Performance

Unusual items (expenses) detracted from Renhe PharmacyLtd's earnings over the last year, but we might see an improvement next year. Based on this observation, we consider it likely that Renhe PharmacyLtd's statutory profit actually understates its earnings potential! Unfortunately, though, its earnings per share actually fell back over the last year. Of course, we've only just scratched the surface when it comes to analysing its earnings; one could also consider margins, forecast growth, and return on investment, among other factors. So while earnings quality is important, it's equally important to consider the risks facing Renhe PharmacyLtd at this point in time. For example, we've discovered 1 warning sign that you should run your eye over to get a better picture of Renhe PharmacyLtd.

Today we've zoomed in on a single data point to better understand the nature of Renhe PharmacyLtd'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.