Qingdao Hi-Tech Moulds & Plastics Technology's (SZSE:301022) Soft Earnings Are Actually Better Than They Appear

The market for Qingdao Hi-Tech Moulds & Plastics Technology Co., Ltd.'s (SZSE:301022) shares didn't move much after it posted weak earnings recently. We think that the softer headline numbers might be getting counterbalanced by some positive underlying factors.

Check out our latest analysis for Qingdao Hi-Tech Moulds & Plastics Technology

How Do Unusual Items Influence Profit?

To properly understand Qingdao Hi-Tech Moulds & Plastics Technology's profit results, we need to consider the CN¥4.3m expense attributed to unusual items. While deductions due to unusual items are disappointing in the first instance, there is a silver lining. We looked at thousands of listed companies and found that unusual items are very often one-off in nature. 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 Qingdao Hi-Tech Moulds & Plastics Technology 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 Qingdao Hi-Tech Moulds & Plastics Technology.

An Unusual Tax Situation

Just as we noted the unusual items, we must inform you that Qingdao Hi-Tech Moulds & Plastics Technology received a tax benefit which contributed CN¥3.7m to the bottom line. 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. While we think it's good that the company has booked a tax benefit, it does mean that there's every chance the statutory profit will come in a lot higher than it would be if the income was adjusted for one-off factors.

Our Take On Qingdao Hi-Tech Moulds & Plastics Technology's Profit Performance

In the last year Qingdao Hi-Tech Moulds & Plastics Technology received a tax benefit, which boosted its profit in a way that might not be much more sustainable than turning prime farmland into gas fields. But on the other hand, it also saw an unusual item depress its profit. Considering the aforementioned, we think that Qingdao Hi-Tech Moulds & Plastics Technology's profits are probably a reasonable reflection of its underlying profitability; although we'd be confident in that conclusion if we saw a cleaner set of results. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. For instance, we've identified 3 warning signs for Qingdao Hi-Tech Moulds & Plastics Technology (2 shouldn't be ignored) you should be familiar with.

Our examination of Qingdao Hi-Tech Moulds & Plastics Technology has focussed on certain factors that can make its earnings look better than they are. But there is always more to discover if you are capable of focussing your mind on minutiae. 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.