The market wasn't impressed with the soft earnings from Wafer Works (Shanghai) Co., Ltd. (SHSE:688584) recently. We did some further digging and think they have a few more reasons to be concerned beyond the statutory profit.

How Do Unusual Items Influence Profit?

Importantly, our data indicates that Wafer Works (Shanghai)'s profit received a boost of CN¥45m in unusual items, over the last year. While it's always nice to have higher profit, a large contribution from unusual items sometimes dampens our enthusiasm. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. And that's as you'd expect, given these boosts are described as 'unusual'. Wafer Works (Shanghai) had a rather significant contribution from unusual items relative to its profit to September 2024. All else being equal, this would likely have the effect of making the statutory profit a poor guide to underlying earnings power.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Wafer Works (Shanghai).

Our Take On Wafer Works (Shanghai)'s Profit Performance

As we discussed above, we think the significant positive unusual item makes Wafer Works (Shanghai)'s earnings a poor guide to its underlying profitability. As a result, we think it may well be the case that Wafer Works (Shanghai)'s underlying earnings power is lower than its statutory profit. Sadly, its EPS was down over the last twelve months. 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. If you want to do dive deeper into Wafer Works (Shanghai), you'd also look into what risks it is currently facing. When we did our research, we found 3 warning signs for Wafer Works (Shanghai) (1 is a bit unpleasant!) that we believe deserve your full attention.

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