We Think That There Are Some Issues For XCMG Construction Machinery (SZSE:000425) Beyond Its Promising Earnings

The market for XCMG Construction Machinery Co., Ltd.'s (SZSE:000425) stock was strong after it released a healthy earnings report last week. Despite this, our analysis suggests that there are some factors weakening the foundations of those good profit numbers.

See our latest analysis for XCMG Construction Machinery

How Do Unusual Items Influence Profit?

For anyone who wants to understand XCMG Construction Machinery's profit beyond the statutory numbers, it's important to note that during the last twelve months statutory profit gained from CN¥1.3b worth of unusual items. While it's always nice to have higher profit, a large contribution from unusual items sometimes dampens our enthusiasm. 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, 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 XCMG Construction Machinery's Profit Performance

We'd posit that XCMG Construction Machinery's statutory earnings aren't a clean read on ongoing productivity, due to the large unusual item. Because of this, we think that it may be that XCMG Construction Machinery's statutory profits are better than its underlying earnings power. But at least holders can take some solace from the 32% EPS growth in the last year. At the end of the day, it's essential to consider more than just the factors above, if you want to understand the company properly. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. When we did our research, we found 3 warning signs for XCMG Construction Machinery (1 is a bit concerning!) that we believe deserve your full attention.

Today we've zoomed in on a single data point to better understand the nature of XCMG Construction Machinery'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. 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.