Jiangsu chunlan refrigerating equipment stockltd's (SHSE:600854) Earnings Might Not Be As Promising As They Seem

Solid profit numbers didn't seem to be enough to please Jiangsu chunlan refrigerating equipment stock co.,ltd.'s (SHSE:600854) shareholders. We think that they might be concerned about some underlying details that our analysis found.

Check out our latest analysis for Jiangsu chunlan refrigerating equipment stockltd

The Power Of Non-Operating Revenue

Companies will classify their revenue streams as either operating revenue or other revenue. Oftentimes, non-operating revenue spikes are not repeated, so it makes sense to be cautious where non-operating revenue has made a very large contribution to total profit. However, we note that when non-operating revenue increases suddenly, it will sometimes generate an unsustainable boost to profit. Notably, Jiangsu chunlan refrigerating equipment stockltd had a significant increase in non-operating revenue as a proportion of total revenue over the last year. In fact, our data indicates that non-operating revenue ratio increased from 33% to 45%. 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 Jiangsu chunlan refrigerating equipment stockltd.

How Do Unusual Items Influence Profit?

As well as that spike in non-operating revenue, we should also consider the CN¥3.1m boost to profit coming from unusual items, over the last year. We can't deny that higher profits generally leave us optimistic, but we'd prefer it if the profit were to be sustainable. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. 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).

Our Take On Jiangsu chunlan refrigerating equipment stockltd's Profit Performance

In the last year Jiangsu chunlan refrigerating equipment stockltd's non-operating revenue really gave it a boost, but not in a way that is necessarily going to be sustained. And on top of that, it also saw an unusual item boost its profit, suggesting that next year might see a lower profit number, if these events are not repeated and everything else is equal. Considering all this we'd argue Jiangsu chunlan refrigerating equipment stockltd's profits probably give an overly generous impression of its sustainable level of profitability. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. For example - Jiangsu chunlan refrigerating equipment stockltd has 1 warning sign we think you should be aware of.

Our examination of Jiangsu chunlan refrigerating equipment stockltd has focussed on certain factors that can make its earnings look better than they are. And, on that basis, we are somewhat skeptical. 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. 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.