Stock Analysis

Zhe Jiang Headman MachineryLtd's (SHSE:688577) Shareholders Have More To Worry About Than Lackluster Earnings

SHSE:688577
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The recent earnings release from Zhe Jiang Headman Machinery Co.,Ltd. (SHSE:688577 ) was disappointing to investors. We looked deeper and believe that there is even more to be worried about, beyond the soft profit numbers.

View our latest analysis for Zhe Jiang Headman MachineryLtd

earnings-and-revenue-history
SHSE:688577 Earnings and Revenue History November 7th 2024

The Impact Of Unusual Items On 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 gained from CN¥7.5m worth of 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. When we crunched the numbers on thousands of publicly listed companies, we found that a boost from unusual items in a given year is often not repeated the next year. And that's as you'd expect, given these boosts are described as 'unusual'. Zhe Jiang Headman MachineryLtd had a rather significant contribution from unusual items relative to its profit to September 2024. 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 Zhe Jiang Headman MachineryLtd.

An Unusual Tax Situation

Just as we noted the unusual items, we must inform you that Zhe Jiang Headman MachineryLtd received a tax benefit which contributed CN¥2.2m to the bottom line. 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, 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.

Our Take On Zhe Jiang Headman MachineryLtd's Profit Performance

In the last year Zhe Jiang Headman MachineryLtd 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. Considering all this we'd argue Zhe Jiang Headman MachineryLtd's profits probably give an overly generous impression of its sustainable level of profitability. So if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. Every company has risks, and we've spotted 6 warning signs for Zhe Jiang Headman MachineryLtd (of which 2 don't sit too well with us!) you should know about.

Our examination of Zhe Jiang Headman MachineryLtd 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 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 with significant insider holdings 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.