Shanghai Yongmaotai Automotive Technology's (SHSE:605208) Earnings Quality Is Low

The recent earnings release from Shanghai Yongmaotai Automotive Technology Co., Ltd. (SHSE:605208 ) was disappointing to investors. We looked deeper and believe that there is even more to be worried about, beyond the soft profit numbers.

See our latest analysis for Shanghai Yongmaotai Automotive Technology

The Impact Of Unusual Items On Profit

Importantly, our data indicates that Shanghai Yongmaotai Automotive Technology's profit received a boost of CN¥14m 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. We ran the numbers on most publicly listed companies worldwide, and it's very common for unusual items to be once-off in nature. And, after all, that's exactly what the accounting terminology implies. Shanghai Yongmaotai Automotive Technology 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 Shanghai Yongmaotai Automotive Technology.

An Unusual Tax Situation

Just as we noted the unusual items, we must inform you that Shanghai Yongmaotai Automotive Technology received a tax benefit which contributed CN¥12m to the bottom line. This is meaningful because companies usually pay tax rather than receive tax benefits. We're sure the company was pleased with its tax benefit. 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. In the likely event the tax benefit is not repeated, we'd expect to see its statutory profit levels drop, at least in the absence of strong growth. So while we think it's great to receive a tax benefit, it does tend to imply an increased risk that the statutory profit overstates the sustainable earnings power of the business.

Our Take On Shanghai Yongmaotai Automotive Technology's Profit Performance

In its last report Shanghai Yongmaotai Automotive Technology received a tax benefit which might make its profit look better than it really is on a underlying level. Furthermore, it also benefitted from a positive unusual item, which boosted the profit result even higher. Considering all this we'd argue Shanghai Yongmaotai Automotive Technology's profits probably give an overly generous impression of its sustainable level of profitability. In light of this, if you'd like to do more analysis on the company, it's vital to be informed of the risks involved. Be aware that Shanghai Yongmaotai Automotive Technology is showing 4 warning signs in our investment analysis and 2 of those are concerning...

Our examination of Shanghai Yongmaotai Automotive Technology has focussed on certain factors that can make its earnings look better than they are. And, on that basis, we are somewhat skeptical. 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 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.