Jiangsu Lianfa TextileLtd's (SZSE:002394) Soft Earnings Are Actually Better Than They Appear

The market was pleased with the recent earnings report from Jiangsu Lianfa Textile Co.,Ltd (SZSE:002394), despite the profit numbers being soft. We think that investors might be looking at some positive factors beyond the earnings numbers.

View our latest analysis for Jiangsu Lianfa TextileLtd

How Do Unusual Items Influence Profit?

For anyone who wants to understand Jiangsu Lianfa TextileLtd's profit beyond the statutory numbers, it's important to note that during the last twelve months statutory profit was reduced by CN¥45m due to unusual items. It's never great to see unusual items costing the company profits, but on the upside, things might improve sooner rather than later. 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. If Jiangsu Lianfa TextileLtd 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 Jiangsu Lianfa TextileLtd.

Our Take On Jiangsu Lianfa TextileLtd's Profit Performance

Because unusual items detracted from Jiangsu Lianfa TextileLtd'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 Jiangsu Lianfa TextileLtd's statutory profit actually understates its earnings potential! On the other hand, its EPS actually shrunk in the last twelve months. At the end of the day, it's essential to consider more than just the factors above, if you want to understand the company properly. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. Every company has risks, and we've spotted 3 warning signs for Jiangsu Lianfa TextileLtd (of which 2 can't be ignored!) you should know about.

This note has only looked at a single factor that sheds light on the nature of Jiangsu Lianfa TextileLtd's profit. But there are plenty of other ways to inform your opinion of a company. 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.

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.