We Think Changzhou Shenli Electrical Machine's (SHSE:603819) Solid Earnings Are Understated

Investors signalled that they were pleased with Changzhou Shenli Electrical Machine Incorporated Company's (SHSE:603819) most recent earnings report. Looking deeper at the numbers, we found several encouraging factors beyond the headline profit numbers.

Check out our latest analysis for Changzhou Shenli Electrical Machine

The Impact Of Unusual Items On Profit

For anyone who wants to understand Changzhou Shenli Electrical Machine's profit beyond the statutory numbers, it's important to note that during the last twelve months statutory profit was reduced by CN¥5.3m due to unusual items. 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. If Changzhou Shenli Electrical Machine doesn't see those unusual expenses repeat, then all else being equal we'd expect its profit to increase over the coming year.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Changzhou Shenli Electrical Machine.

An Unusual Tax Situation

Just as we noted the unusual items, we must inform you that Changzhou Shenli Electrical Machine received a tax benefit which contributed CN¥6.6m to the bottom line. This is meaningful because companies usually pay tax rather than receive tax benefits. The receipt of a tax benefit is obviously a good thing, on its own. And since it previously lost money, it may well simply indicate the realisation of past tax losses. 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.

Our Take On Changzhou Shenli Electrical Machine's Profit Performance

In the last year Changzhou Shenli Electrical Machine 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. Having said that, it also had a unusual item reducing its profit. Given the contrasting considerations, we don't have a strong view as to whether Changzhou Shenli Electrical Machine's profits are an apt reflection of its underlying potential for profit. In light of this, if you'd like to do more analysis on the company, it's vital to be informed of the risks involved. For example, we've discovered 1 warning sign that you should run your eye over to get a better picture of Changzhou Shenli Electrical Machine.

Our examination of Changzhou Shenli Electrical Machine 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 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.