Anhui Great Wall Military Industry's (SHSE:601606) Soft Earnings Don't Show The Whole Picture

Shareholders appeared unconcerned with Anhui Great Wall Military Industry Co., Ltd.'s (SHSE:601606) lackluster earnings report last week. We did some digging, and we believe the earnings are stronger than they seem.

See our latest analysis for Anhui Great Wall Military Industry

The Impact Of Unusual Items On Profit

Importantly, our data indicates that Anhui Great Wall Military Industry's profit was reduced by CN¥17m, due to unusual items, over the last year. While deductions due to unusual items are disappointing in the first instance, there is a silver lining. 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 Anhui Great Wall Military Industry 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 Anhui Great Wall Military Industry.

An Unusual Tax Situation

Having already discussed the impact of the unusual items, we should also note that Anhui Great Wall Military Industry received a tax benefit of CN¥8.1m. It's always a bit noteworthy when a company is paid by the tax man, rather than paying the tax man. The receipt of a tax benefit is obviously a good thing, on its own. However, our data indicates that tax benefits can temporarily boost statutory profit in the year it is booked, but subsequently profit may fall back. 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 Anhui Great Wall Military Industry's Profit Performance

In its last report Anhui Great Wall Military Industry received a tax benefit which might make its profit look better than it really is on a underlying level. Having said that, it also had a unusual item reducing its profit. Considering the aforementioned, we think that Anhui Great Wall Military Industry'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. If you want to do dive deeper into Anhui Great Wall Military Industry, you'd also look into what risks it is currently facing. Be aware that Anhui Great Wall Military Industry is showing 3 warning signs in our investment analysis and 1 of those is a bit unpleasant...

Our examination of Anhui Great Wall Military Industry has focussed on certain factors that can make its earnings look better than they are. 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 that insiders are buying.

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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.