Earth-Panda Advanced Magnetic MaterialLtd's (SHSE:688077) Earnings Might Not Be As Promising As They Seem

Solid profit numbers didn't seem to be enough to please Earth-Panda Advanced Magnetic Material Co.,Ltd.'s (SHSE:688077) shareholders. Our analysis suggests they may be concerned about some underlying details.

See our latest analysis for Earth-Panda Advanced Magnetic MaterialLtd

How Do Unusual Items Influence Profit?

To properly understand Earth-Panda Advanced Magnetic MaterialLtd's profit results, we need to consider the CN¥1.9m gain attributed to unusual items. While we like to see profit increases, we tend to be a little more cautious when unusual items have made a big contribution. 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 that's as you'd expect, given these boosts are described as 'unusual'. We can see that Earth-Panda Advanced Magnetic MaterialLtd's positive unusual items were quite significant relative to its profit in the year to June 2024. All else being equal, this would likely have the effect of making the statutory profit a poor guide to underlying earnings power.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Earth-Panda Advanced Magnetic MaterialLtd.

An Unusual Tax Situation

Just as we noted the unusual items, we must inform you that Earth-Panda Advanced Magnetic MaterialLtd received a tax benefit which contributed CN¥11m to the bottom line. This is meaningful because companies usually pay tax rather than receive tax benefits. We're sure the company was pleased with its 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, 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 Earth-Panda Advanced Magnetic MaterialLtd's Profit Performance

In the last year Earth-Panda Advanced Magnetic MaterialLtd 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. And on top of that, it also saw an unusual item boost its profit, suggesting that next year might see a lower profit number, if these events are not repeated. For all the reasons mentioned above, we think that, at a glance, Earth-Panda Advanced Magnetic MaterialLtd's statutory profits could be considered to be low quality, because they are likely to give investors an overly positive impression of the company. If you want to do dive deeper into Earth-Panda Advanced Magnetic MaterialLtd, you'd also look into what risks it is currently facing. For example, Earth-Panda Advanced Magnetic MaterialLtd has 4 warning signs (and 3 which can't be ignored) we think you should know about.

Our examination of Earth-Panda Advanced Magnetic MaterialLtd has focussed on certain factors that can make its earnings look better than they are. And, on that basis, we are somewhat skeptical. 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 with high insider ownership.

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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.