Changshu Fengfan Power Equipment's (SHSE:601700) Earnings Are Of Questionable Quality

Changshu Fengfan Power Equipment Co., Ltd. (SHSE:601700) announced strong profits, but the stock was stagnant. We did some digging, and we found some concerning factors in the details.

Check out our latest analysis for Changshu Fengfan Power Equipment

An Unusual Tax Situation

Changshu Fengfan Power Equipment reported a tax benefit of CN¥21m, which is well worth noting. 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! 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.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Changshu Fengfan Power Equipment.

Our Take On Changshu Fengfan Power Equipment's Profit Performance

Changshu Fengfan Power Equipment reported that it received a tax benefit, rather than paid tax, in its last report. As a result we don't think its profit result, which includes that tax-boost, is a good guide to its sustainable profit levels. Because of this, we think that it may be that Changshu Fengfan Power Equipment's statutory profits are better than its underlying earnings power. The silver lining is that its EPS growth over the last year has been really wonderful, even if it's not a perfect measure. The goal of this article has been to assess how well we can rely on the statutory earnings to reflect the company's potential, but there is plenty more to consider. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. For example - Changshu Fengfan Power Equipment has 1 warning sign we think you should be aware of.

This note has only looked at a single factor that sheds light on the nature of Changshu Fengfan Power Equipment'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 that insiders are buying to be useful.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.