Guangdong Nedfon Air System's (SZSE:301043) Solid Profits Have Weak Fundamentals

Last week's profit announcement from Guangdong Nedfon Air System Co., Ltd. (SZSE:301043) was underwhelming for investors, despite headline numbers being robust. We did some digging and found some worrying underlying problems.

See our latest analysis for Guangdong Nedfon Air System

How Do Unusual Items Influence Profit?

To properly understand Guangdong Nedfon Air System's profit results, we need to consider the CN¥10m gain attributed to unusual items. We can't deny that higher profits generally leave us optimistic, but we'd prefer it if the profit were to be sustainable. 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 that's as you'd expect, given these boosts are described as 'unusual'. If Guangdong Nedfon Air System doesn't see that contribution repeat, then all else being equal we'd expect its profit to drop over the current year.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Guangdong Nedfon Air System.

Our Take On Guangdong Nedfon Air System's Profit Performance

We'd posit that Guangdong Nedfon Air System's statutory earnings aren't a clean read on ongoing productivity, due to the large unusual item. Therefore, it seems possible to us that Guangdong Nedfon Air System's true underlying earnings power is actually less than its statutory profit. Nonetheless, it's still worth noting that its earnings per share have grown at 17% over the last three years. 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. So while earnings quality is important, it's equally important to consider the risks facing Guangdong Nedfon Air System at this point in time. For example, we've discovered 1 warning sign that you should run your eye over to get a better picture of Guangdong Nedfon Air System.

Today we've zoomed in on a single data point to better understand the nature of Guangdong Nedfon Air System'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. 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.