JinGuan Electric (SHSE:688517) Strong Profits May Be Masking Some Underlying Issues

JinGuan Electric Co., Ltd.'s (SHSE:688517) healthy profit numbers didn't contain any surprises for investors. However the statutory profit number doesn't tell the whole story, and we have found some factors which might be of concern to shareholders.

Check out our latest analysis for JinGuan Electric

How Do Unusual Items Influence Profit?

Importantly, our data indicates that JinGuan Electric's profit received a boost of CN¥8.6m in unusual items, over the last year. We can't deny that higher profits generally leave us optimistic, but we'd prefer it if the profit were to be sustainable. 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. Assuming those unusual items don't show up again in the current year, we'd thus expect profit to be weaker next year (in the absence of business growth, that is).

That might leave you wondering what analysts are forecasting in terms of future profitability. Luckily, you can click here to see an interactive graph depicting future profitability, based on their estimates.

Our Take On JinGuan Electric's Profit Performance

Arguably, JinGuan Electric's statutory earnings have been distorted by unusual items boosting profit. Therefore, it seems possible to us that JinGuan Electric's true underlying earnings power is actually less than its statutory profit. But at least holders can take some solace from the 11% EPS growth in the last year. Of course, we've only just scratched the surface when it comes to analysing its earnings; one could also consider margins, forecast growth, and return on investment, among other factors. So while earnings quality is important, it's equally important to consider the risks facing JinGuan Electric at this point in time. Case in point: We've spotted 2 warning signs for JinGuan Electric you should be aware of.

This note has only looked at a single factor that sheds light on the nature of JinGuan Electric's profit. But there are plenty of other ways to inform your opinion of a company. Some people consider a high return on equity to be a good sign of a quality business. 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.