Qingdao Weflo Valve's (SZSE:002871) Conservative Accounting Might Explain Soft Earnings

Shareholders appeared unconcerned with Qingdao Weflo Valve Co., Ltd.'s (SZSE:002871) lackluster earnings report last week. Our analysis suggests that while the profits are soft, the foundations of the business are strong.

See our latest analysis for Qingdao Weflo Valve

How Do Unusual Items Influence Profit?

For anyone who wants to understand Qingdao Weflo Valve's profit beyond the statutory numbers, it's important to note that during the last twelve months statutory profit was reduced by CN¥21m 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, after all, that's exactly what the accounting terminology implies. Assuming those unusual expenses don't come up again, we'd therefore expect Qingdao Weflo Valve to produce a higher profit next year, all else being equal.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Qingdao Weflo Valve.

Our Take On Qingdao Weflo Valve's Profit Performance

Unusual items (expenses) detracted from Qingdao Weflo Valve's earnings over the last year, but we might see an improvement next year. Because of this, we think Qingdao Weflo Valve's earnings potential is at least as good as it seems, and maybe even better! And on top of that, its earnings per share have grown at an extremely impressive rate over the last three years. The goal of this article has been to assess how well we can rely on the statutory earnings to reflect the company's potential, but there is plenty more to consider. So while earnings quality is important, it's equally important to consider the risks facing Qingdao Weflo Valve at this point in time. Case in point: We've spotted 2 warning signs for Qingdao Weflo Valve you should be aware of.

Today we've zoomed in on a single data point to better understand the nature of Qingdao Weflo Valve'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.