Shareholders Shouldn’t Be Too Comfortable With WPG (Shanghai) Smart Water PublicLtd's (SHSE:603956) Strong Earnings

We didn't see WPG (Shanghai) Smart Water Public Co.,Ltd.'s (SHSE:603956) stock surge when it reported robust earnings recently. We think that investors might be worried about the foundations the earnings are built on.

See our latest analysis for WPG (Shanghai) Smart Water PublicLtd

The Impact Of Unusual Items On Profit

To properly understand WPG (Shanghai) Smart Water PublicLtd's profit results, we need to consider the CN¥13m gain attributed to unusual items. While it's always nice to have higher profit, a large contribution from unusual items sometimes dampens our enthusiasm. We ran the numbers on most publicly listed companies worldwide, and it's very common for unusual items to be once-off in nature. And, after all, that's exactly what the accounting terminology implies. We can see that WPG (Shanghai) Smart Water PublicLtd's positive unusual items were quite significant relative to its profit in the year to December 2023. As a result, we can surmise that the unusual items are making its statutory profit significantly stronger than it would otherwise be.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of WPG (Shanghai) Smart Water PublicLtd.

An Unusual Tax Situation

Having already discussed the impact of the unusual items, we should also note that WPG (Shanghai) Smart Water PublicLtd received a tax benefit of CN¥8.9m. This is meaningful because companies usually pay tax rather than receive tax benefits. Of course, prima facie it's great to receive a tax benefit. And given that it lost money last year, it seems possible that the benefit is evidence that it now expects to find value in its past tax losses. 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. So while we think it's great to receive a tax benefit, it does tend to imply an increased risk that the statutory profit overstates the sustainable earnings power of the business.

Our Take On WPG (Shanghai) Smart Water PublicLtd's Profit Performance

In the last year WPG (Shanghai) Smart Water PublicLtd 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. Furthermore, it also benefitted from a positive unusual item, which boosted the profit result even higher. For the reasons mentioned above, we think that a perfunctory glance at WPG (Shanghai) Smart Water PublicLtd's statutory profits might make it look better than it really is on an underlying level. If you want to do dive deeper into WPG (Shanghai) Smart Water PublicLtd, you'd also look into what risks it is currently facing. Be aware that WPG (Shanghai) Smart Water PublicLtd is showing 3 warning signs in our investment analysis and 2 of those are potentially serious...

In this article we've looked at a number of factors that can impair the utility of profit numbers, and we've come away cautious. 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.