The Strong Earnings Posted By Shanghai Sinotec (SHSE:603121) Are A Good Indication Of The Strength Of The Business

The subdued stock price reaction suggests that Shanghai Sinotec Co., Ltd.'s (SHSE:603121) strong earnings didn't offer any surprises. Investors are probably missing some underlying factors which are encouraging for the future of the company.

View our latest analysis for Shanghai Sinotec

How Do Unusual Items Influence Profit?

For anyone who wants to understand Shanghai Sinotec's profit beyond the statutory numbers, it's important to note that during the last twelve months statutory profit was reduced by CN¥56m due to unusual items. It's never great to see unusual items costing the company profits, but on the upside, things might improve sooner rather than later. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. And that's hardly a surprise given these line items are considered unusual. Assuming those unusual expenses don't come up again, we'd therefore expect Shanghai Sinotec to produce a higher profit next year, all else being equal.

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

Our Take On Shanghai Sinotec's Profit Performance

Because unusual items detracted from Shanghai Sinotec's earnings over the last year, you could argue that we can expect an improved result in the current quarter. Because of this, we think Shanghai Sinotec's earnings potential is at least as good as it seems, and maybe even better! And on top of that, its earnings per share have grown at an extremely impressive rate 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. If you want to do dive deeper into Shanghai Sinotec, you'd also look into what risks it is currently facing. Our analysis shows 2 warning signs for Shanghai Sinotec (1 is a bit unpleasant!) and we strongly recommend you look at these before investing.

This note has only looked at a single factor that sheds light on the nature of Shanghai Sinotec's profit. But there is always more to discover if you are capable of focussing your mind on minutiae. 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 that insiders are buying.

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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.