Zhejiang Xinao Textiles' (SHSE:603889) Solid Earnings May Rest On Weak Foundations

Zhejiang Xinao Textiles Inc.'s (SHSE:603889) healthy profit numbers didn't contain any surprises for investors. However the statutory profit number doesn't tell the whole story, and we have found some factors which might be of concern to shareholders.

Check out our latest analysis for Zhejiang Xinao Textiles

How Do Unusual Items Influence Profit?

For anyone who wants to understand Zhejiang Xinao Textiles' profit beyond the statutory numbers, it's important to note that during the last twelve months statutory profit gained from CN¥41m worth of 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. When we crunched the numbers on thousands of publicly listed companies, we found that a boost from unusual items in a given year is often not repeated the next year. Which is hardly surprising, given the name. If Zhejiang Xinao Textiles doesn't see that contribution repeat, then all else being equal we'd expect its profit to drop over the current year.

That might leave you wondering what analysts are forecasting in terms of future profitability. Luckily, you can click here to see an interactive graph depicting future profitability, based on their estimates.

Our Take On Zhejiang Xinao Textiles' Profit Performance

We'd posit that Zhejiang Xinao Textiles' statutory earnings aren't a clean read on ongoing productivity, due to the large unusual item. Therefore, it seems possible to us that Zhejiang Xinao Textiles' true underlying earnings power is actually less than its statutory profit. But at least holders can take some solace from the 36% per annum growth in EPS for the last three. The goal of this article has been to assess how well we can rely on the statutory earnings to reflect the company's potential, but there is plenty more to consider. If you want to do dive deeper into Zhejiang Xinao Textiles, you'd also look into what risks it is currently facing. At Simply Wall St, we found 1 warning sign for Zhejiang Xinao Textiles and we think they deserve your attention.

This note has only looked at a single factor that sheds light on the nature of Zhejiang Xinao Textiles' profit. 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. 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.