There May Be Underlying Issues With The Quality Of Changchun Zhiyuan New Energy Equipment's (SZSE:300985) Earnings

Last week's profit announcement from Changchun Zhiyuan New Energy Equipment Co., Ltd (SZSE:300985) was underwhelming for investors, despite headline numbers being robust. We think that the market might be paying attention to some underlying factors that they find to be concerning.

Check out our latest analysis for Changchun Zhiyuan New Energy Equipment

The Power Of Non-Operating Revenue

Most companies divide classify their revenue as either 'operating revenue', which comes from normal operations, and other revenue, which could include government grants, for example. Where possible, we prefer rely on operating revenue to get a better understanding of how the business is functioning. Importantly, the non-operating revenue often comes without associated ongoing costs, so it can boost profit by letting it fall straight to the bottom line, making the operating business seem better than it really is. Notably, Changchun Zhiyuan New Energy Equipment had a significant increase in non-operating revenue over the last year. In fact, our data indicates that non-operating revenue increased from CN¥10.5m to CN¥158.9m. If that non-operating revenue fails to manifest in the current year, then there's a real risk the bottom line profit result will be impacted negatively. In order to better understand a company's profit result, it can sometimes help to consider whether the result would be very different without a sudden increase in non-operating revenue.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Changchun Zhiyuan New Energy Equipment.

Our Take On Changchun Zhiyuan New Energy Equipment's Profit Performance

As discussed above, Changchun Zhiyuan New Energy Equipment's sharp increase in non-operating revenue boosted its profit over the last year, and if that non-operating revenue is not repeated, then the trailing twelve months profit probably isn't as good as it seems. Because of this, we think that it may be that Changchun Zhiyuan New Energy Equipment's statutory profits are better than its underlying earnings power. On the bright side, the company showed enough improvement to book a profit this year, after losing money last year. Of course, we've only just scratched the surface when it comes to analysing its earnings; one could also consider margins, forecast growth, and return on investment, among other factors. So while earnings quality is important, it's equally important to consider the risks facing Changchun Zhiyuan New Energy Equipment at this point in time. To that end, you should learn about the 3 warning signs we've spotted with Changchun Zhiyuan New Energy Equipment (including 1 which makes us a bit uncomfortable).

This note has only looked at a single factor that sheds light on the nature of Changchun Zhiyuan New Energy Equipment's profit. 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.