Investors were disappointed by Hunan Oil Pump Co., Ltd.'s (SHSE:603319 ) latest earnings release. We did some analysis, and found that there are some reasons to be cautious about the headline numbers.

The Impact Of Unusual Items On Profit

To properly understand Hunan Oil Pump's profit results, we need to consider the CN¥30m gain attributed to unusual items. While we like to see profit increases, we tend to be a little more cautious when unusual items have made a big contribution. 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 items don't show up again in the current year, we'd thus expect profit to be weaker next year (in the absence of business growth, that is).

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 Hunan Oil Pump's Profit Performance

Arguably, Hunan Oil Pump's statutory earnings have been distorted by unusual items boosting profit. Because of this, we think that it may be that Hunan Oil Pump's statutory profits are better than its underlying earnings power. But at least holders can take some solace from the 20% per annum growth in EPS for the last three. 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. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. For example - Hunan Oil Pump has 1 warning sign we think you should be aware of.

Today we've zoomed in on a single data point to better understand the nature of Hunan Oil Pump'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.