Why Jiangsu Wuyang Automation Control Technology's (SZSE:300420) Soft Earnings Are Just The Beginning Of Its Problems

The market shrugged off Jiangsu Wuyang Automation Control Technology Co., Ltd.'s (SZSE:300420) weak earnings report. Despite the strength in the stock, we feel that investors should be cautious about some numbers in the earnings.

Check out our latest analysis for Jiangsu Wuyang Automation Control Technology

The Impact Of Unusual Items On Profit

Importantly, our data indicates that Jiangsu Wuyang Automation Control Technology's profit received a boost of CN¥18m in unusual items, over the last year. While it's always nice to have higher profit, a large contribution from unusual items sometimes dampens our enthusiasm. 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. We can see that Jiangsu Wuyang Automation Control Technology's positive unusual items were quite significant relative to its profit in the year to March 2024. All else being equal, this would likely have the effect of making the statutory profit a poor guide to underlying earnings power.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Jiangsu Wuyang Automation Control Technology.

An Unusual Tax Situation

Just as we noted the unusual items, we must inform you that Jiangsu Wuyang Automation Control Technology received a tax benefit which contributed CN¥5.5m to the bottom line. This is meaningful because companies usually pay tax rather than receive tax benefits. The receipt of a tax benefit is obviously a good thing, on its own. 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. So while we think it's great to receive a tax benefit, it does tend to imply an increased risk that the statutory profit overstates the sustainable earnings power of the business.

Our Take On Jiangsu Wuyang Automation Control Technology's Profit Performance

In the last year Jiangsu Wuyang Automation Control Technology 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. Furthermore, it also benefitted from a positive unusual item, which boosted the profit result even higher. Considering all this we'd argue Jiangsu Wuyang Automation Control Technology's profits probably give an overly generous impression of its sustainable level of profitability. If you want to do dive deeper into Jiangsu Wuyang Automation Control Technology, you'd also look into what risks it is currently facing. For example, we've found that Jiangsu Wuyang Automation Control Technology has 2 warning signs (1 doesn't sit too well with us!) that deserve your attention before going any further with your analysis.

In this article we've looked at a number of factors that can impair the utility of profit numbers, and we've come away cautious. But there are plenty of other ways to inform your opinion of a company. For example, many people consider a high return on equity as an indication of favorable business economics, while others like to 'follow the money' and search out stocks that insiders are buying. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.

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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.