The subdued market reaction suggests that Qingdao Tianneng Heavy Industries Co.,Ltd's (SZSE:300569) recent earnings didn't contain any surprises. We think that investors are worried about some weaknesses underlying the earnings.

An Unusual Tax Situation

Qingdao Tianneng Heavy IndustriesLtd reported a tax benefit of CN¥19m, which is well worth noting. This is of course a bit out of the ordinary, given it is more common for companies to be paying tax than receiving tax benefits! The receipt of a tax benefit is obviously a good thing, on its own. However, the devil in the detail is that these kind of benefits only impact in the year they are booked, and are often one-off in nature. Assuming the tax benefit is not repeated every year, we could see its profitability drop noticeably, all else being equal.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Qingdao Tianneng Heavy IndustriesLtd.

Our Take On Qingdao Tianneng Heavy IndustriesLtd's Profit Performance

As we have already discussed Qingdao Tianneng Heavy IndustriesLtd reported that it received a tax benefit, rather than paying tax, in the last year. As a result we don't think its profit result, which includes that tax-boost, is a good guide to its sustainable profit levels. Therefore, it seems possible to us that Qingdao Tianneng Heavy IndustriesLtd's true underlying earnings power is actually less than its statutory profit. Sadly, its EPS was down over the last twelve months. 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. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. For instance, we've identified 5 warning signs for Qingdao Tianneng Heavy IndustriesLtd (3 make us uncomfortable) you should be familiar with.

This note has only looked at a single factor that sheds light on the nature of Qingdao Tianneng Heavy IndustriesLtd'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.