There May Be Underlying Issues With The Quality Of Shanghai Sinotec's (SHSE:603121) Earnings

Last week's profit announcement from Shanghai Sinotec Co., Ltd. (SHSE:603121) was underwhelming for investors, despite headline numbers being robust. We think that the market might be paying attention to some underlying factors that they find to be concerning.

Check out our latest analysis for Shanghai Sinotec

The Impact Of Unusual Items On 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 gained from CN¥19m worth of unusual items. 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. Which is hardly surprising, given the name. 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).

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

Arguably, Shanghai Sinotec's statutory earnings have been distorted by unusual items boosting profit. Because of this, we think that it may be that Shanghai Sinotec's statutory profits are better than its underlying earnings power. Nonetheless, it's still worth noting that its earnings per share have grown at 28% over the last three years. 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 Shanghai Sinotec, you'd also look into what risks it is currently facing. For example, we've discovered 2 warning signs that you should run your eye over to get a better picture of Shanghai Sinotec.

This note has only looked at a single factor that sheds light on the nature of Shanghai Sinotec'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. 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.