Ferrotec (An Hui) Technology DevelopmentLTD's (SZSE:301297) Solid Earnings May Rest On Weak Foundations

Following the solid earnings report from Ferrotec (An Hui) Technology Development Co.,LTD (SZSE:301297), the market responded by bidding up the stock price. Despite this, our analysis suggests that there are some factors weakening the foundations of those good profit numbers.

Check out our latest analysis for Ferrotec (An Hui) Technology DevelopmentLTD

How Do Unusual Items Influence Profit?

To properly understand Ferrotec (An Hui) Technology DevelopmentLTD's profit results, we need to consider the CN¥8.6m 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, after all, that's exactly what the accounting terminology implies. Assuming those unusual items don't show up again in the current year, we'd thus expect profit to be weaker next year (in the absence of business growth, that is).

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Ferrotec (An Hui) Technology DevelopmentLTD.

Our Take On Ferrotec (An Hui) Technology DevelopmentLTD's Profit Performance

We'd posit that Ferrotec (An Hui) Technology DevelopmentLTD's statutory earnings aren't a clean read on ongoing productivity, due to the large unusual item. Therefore, it seems possible to us that Ferrotec (An Hui) Technology DevelopmentLTD's true underlying earnings power is actually less than its statutory profit. The good news is that its earnings per share increased slightly in the 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. While it's very important to consider the profit and loss statement, you can also learn a lot about a company by looking at its balance sheet. If you're interested we have a graphic representation of Ferrotec (An Hui) Technology DevelopmentLTD's balance sheet.

Today we've zoomed in on a single data point to better understand the nature of Ferrotec (An Hui) Technology DevelopmentLTD's profit. But there is always more to discover if you are capable of focussing your mind on minutiae. 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 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.