Changzhou Xiangming Intelligent Drive System's (SZSE:301226) Conservative Accounting Might Explain Soft Earnings

Soft earnings didn't appear to concern Changzhou Xiangming Intelligent Drive System Corporation's (SZSE:301226) shareholders over the last week. We think that the softer headline numbers might be getting counterbalanced by some positive underlying factors.

See our latest analysis for Changzhou Xiangming Intelligent Drive System

The Impact Of Unusual Items On Profit

To properly understand Changzhou Xiangming Intelligent Drive System's profit results, we need to consider the CN¥5.5m expense attributed to unusual items. While deductions due to unusual items are disappointing in the first instance, there is a silver lining. 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. If Changzhou Xiangming Intelligent Drive System doesn't see those unusual expenses repeat, then all else being equal we'd expect its profit to increase over the coming year.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Changzhou Xiangming Intelligent Drive System.

Our Take On Changzhou Xiangming Intelligent Drive System's Profit Performance

Because unusual items detracted from Changzhou Xiangming Intelligent Drive System's earnings over the last year, you could argue that we can expect an improved result in the current quarter. Based on this observation, we consider it likely that Changzhou Xiangming Intelligent Drive System's statutory profit actually understates its earnings potential! On the other hand, its EPS actually shrunk in the last twelve months. 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. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. For example, Changzhou Xiangming Intelligent Drive System has 4 warning signs (and 2 which are potentially serious) we think you should know about.

This note has only looked at a single factor that sheds light on the nature of Changzhou Xiangming Intelligent Drive System's profit. But there is always more to discover if you are capable of focussing your mind on minutiae. 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 that insiders are buying to be useful.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.