There May Be Underlying Issues With The Quality Of Guangzhou Echom Sci.&Tech.Co.Ltd's (SZSE:002420) Earnings

Investors were disappointed with Guangzhou Echom Sci.&Tech.Co.,Ltd's (SZSE:002420) earnings, despite the strong profit numbers. Our analysis uncovered some concerning factors that we believe the market might be paying attention to.

How Do Unusual Items Influence Profit?

To properly understand Guangzhou Echom Sci.&Tech.Co.Ltd's profit results, we need to consider the CN¥11m gain attributed to unusual items. 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 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. 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 Guangzhou Echom Sci.&Tech.Co.Ltd.

Our Take On Guangzhou Echom Sci.&Tech.Co.Ltd's Profit Performance

We'd posit that Guangzhou Echom Sci.&Tech.Co.Ltd's statutory earnings aren't a clean read on ongoing productivity, due to the large unusual item. Therefore, it seems possible to us that Guangzhou Echom Sci.&Tech.Co.Ltd's true underlying earnings power is actually less than its statutory profit. The good news is that it earned a profit in the last twelve months, despite its previous loss. 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. If you'd like to know more about Guangzhou Echom Sci.&Tech.Co.Ltd as a business, it's important to be aware of any risks it's facing. For example, we've discovered 1 warning sign that you should run your eye over to get a better picture of Guangzhou Echom Sci.&Tech.Co.Ltd.

Today we've zoomed in on a single data point to better understand the nature of Guangzhou Echom Sci.&Tech.Co.Ltd'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. 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.