Shanghai Tunnel Engineering's (SHSE:600820) Earnings Are Of Questionable Quality

Shanghai Tunnel Engineering Co., Ltd. (SHSE:600820) announced strong profits, but the stock was stagnant. Our analysis suggests that shareholders have noticed something concerning in the numbers.

See our latest analysis for Shanghai Tunnel Engineering

How Do Unusual Items Influence Profit?

For anyone who wants to understand Shanghai Tunnel Engineering's profit beyond the statutory numbers, it's important to note that during the last twelve months statutory profit gained from CN¥342m 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 crunched the numbers on thousands of publicly listed companies, we found that a boost from unusual items in a given year is often not repeated the next year. Which is hardly surprising, given the name. If Shanghai Tunnel Engineering doesn't see that contribution repeat, then all else being equal we'd expect its profit to drop over the current year.

That might leave you wondering what analysts are forecasting in terms of future profitability. Luckily, you can click here to see an interactive graph depicting future profitability, based on their estimates.

Our Take On Shanghai Tunnel Engineering's Profit Performance

Arguably, Shanghai Tunnel Engineering's statutory earnings have been distorted by unusual items boosting profit. Because of this, we think that it may be that Shanghai Tunnel Engineering's statutory profits are better than its underlying earnings power. Nonetheless, it's still worth noting that its earnings per share have grown at 29% 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 while earnings quality is important, it's equally important to consider the risks facing Shanghai Tunnel Engineering at this point in time. Case in point: We've spotted 1 warning sign for Shanghai Tunnel Engineering you should be aware of.

Today we've zoomed in on a single data point to better understand the nature of Shanghai Tunnel Engineering'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. 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 that insiders are buying 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.