We Think You Can Look Beyond Zhe Jiang Headman MachineryLtd's (SHSE:688577) Lackluster Earnings

Zhe Jiang Headman Machinery Co.,Ltd.'s (SHSE:688577) stock was strong despite it releasing a soft earnings report last week. However, we think the company is showing some signs that things are more promising than they seem.

See our latest analysis for Zhe Jiang Headman MachineryLtd

How Do Unusual Items Influence Profit?

For anyone who wants to understand Zhe Jiang Headman MachineryLtd's profit beyond the statutory numbers, it's important to note that during the last twelve months statutory profit was reduced by CN¥3.3m due to unusual items. It's never great to see unusual items costing the company profits, but on the upside, things might improve sooner rather than later. We looked at thousands of listed companies and found that unusual items are very often one-off in nature. And that's hardly a surprise given these line items are considered unusual. If Zhe Jiang Headman MachineryLtd 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 Zhe Jiang Headman MachineryLtd.

An Unusual Tax Situation

Having already discussed the impact of the unusual items, we should also note that Zhe Jiang Headman MachineryLtd received a tax benefit of CN¥1.9m. 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. 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. While we think it's good that the company has booked a tax benefit, it does mean that there's every chance the statutory profit will come in a lot higher than it would be if the income was adjusted for one-off factors.

Our Take On Zhe Jiang Headman MachineryLtd's Profit Performance

In its last report Zhe Jiang Headman MachineryLtd received a tax benefit which might make its profit look better than it really is on a underlying level. Having said that, it also had a unusual item reducing its profit. Based on these factors, it's hard to tell if Zhe Jiang Headman MachineryLtd's profits are a reasonable reflection of its underlying profitability. 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. Be aware that Zhe Jiang Headman MachineryLtd is showing 4 warning signs in our investment analysis and 2 of those are significant...

Our examination of Zhe Jiang Headman MachineryLtd has focussed on certain factors that can make its earnings look better than they are. 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. 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.