Solid Earnings May Not Tell The Whole Story For Jiangsu chunlan refrigerating equipment stockltd (SHSE:600854)

Jiangsu chunlan refrigerating equipment stock co.,ltd.'s (SHSE:600854 ) stock didn't jump after it announced some healthy earnings. We did some digging and believe investors may be worried about some underlying factors in the report.

Check out our latest analysis for Jiangsu chunlan refrigerating equipment stockltd

The Power Of Non-Operating Revenue

At most companies, some revenue streams, such as government grants, are accounted for as non-operating revenue, while the core business is said to produce operating revenue. Generally speaking, operating revenue is a more reliable guide to the sustainable revenue generating capacity of the business. 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. It's worth noting that Jiangsu chunlan refrigerating equipment stockltd saw a big increase in non-operating revenue as a proportion of total revenue over the last year. Indeed, this proportion rose from 19% last year to 26% this year. 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. Sometimes, you can get a better idea of the underlying earnings potential of a company by excluding unusual boosts to 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.

The Impact Of Unusual Items On Profit

As well as that spike in non-operating revenue, we should also consider the CN¥4.2m boost to profit coming from unusual items, over the last year. While we like to see profit increases, we tend to be a little more cautious when unusual items have made a big contribution. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. Which is hardly surprising, given the name. If Jiangsu chunlan refrigerating equipment stockltd doesn't see that contribution repeat, then all else being equal we'd expect its profit to drop over the current year.

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

In its last report Jiangsu chunlan refrigerating equipment stockltd benefitted from a spike in non-operating revenue which may have boosted its profit in a way that may be no more sustainable than low quality coal mining. 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. For the reasons mentioned above, we think that a perfunctory glance at Jiangsu chunlan refrigerating equipment stockltd's statutory profits might make it look better than it really is on an underlying level. If you'd like to know more about Jiangsu chunlan refrigerating equipment stockltd as a business, it's important to be aware of any risks it's facing. 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 are plenty of other ways to inform your opinion of a company. Some people consider a high return on equity to be a good sign of a quality business. 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.