Wuxi Lihu's (SZSE:300694) Soft Earnings Are Actually Better Than They Appear

The market was pleased with the recent earnings report from Wuxi Lihu Corporation Limited. (SZSE:300694), despite the profit numbers being soft. Our analysis suggests that investors may have noticed some promising signs beyond the statutory profit figures.

See our latest analysis for Wuxi Lihu

How Do Unusual Items Influence Profit?

For anyone who wants to understand Wuxi Lihu's profit beyond the statutory numbers, it's important to note that during the last twelve months statutory profit was reduced by CN¥15m 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, after all, that's exactly what the accounting terminology implies. Assuming those unusual expenses don't come up again, we'd therefore expect Wuxi Lihu 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 Wuxi Lihu.

Our Take On Wuxi Lihu's Profit Performance

Because unusual items detracted from Wuxi Lihu's earnings over the last year, you could argue that we can expect an improved result in the current quarter. Based on this observation, we consider it likely that Wuxi Lihu's statutory profit actually understates its earnings potential! And on top of that, its earnings per share have grown at an extremely impressive rate over the last three years. 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. So if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. To that end, you should learn about the 2 warning signs we've spotted with Wuxi Lihu (including 1 which makes us a bit uncomfortable).

Today we've zoomed in on a single data point to better understand the nature of Wuxi Lihu'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. While it might take a little research on your behalf, you may find this free collection of companies boasting high return on equity, or this list of stocks with significant insider holdings to be useful.

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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.