Earnings Troubles May Signal Larger Issues for Shan Xi Hua Yang Group New EnergyLtd (SHSE:600348) Shareholders

A lackluster earnings announcement from Shan Xi Hua Yang Group New Energy Co.,Ltd. (SHSE:600348) last week didn't sink the stock price. We think that investors are worried about some weaknesses underlying the earnings.

See our latest analysis for Shan Xi Hua Yang Group New EnergyLtd

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. 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. It's worth noting that Shan Xi Hua Yang Group New EnergyLtd saw a big increase in non-operating revenue over the last year. Indeed, its non-operating revenue rose from CN¥1.84b last year to CN¥3.12b 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. 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.

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 Shan Xi Hua Yang Group New EnergyLtd's Profit Performance

Because Shan Xi Hua Yang Group New EnergyLtd's non-operating revenue spiked quite noticeably last year, you could argue that a focus on statutory profit would be too generous because profits may drop back in the future (when that non-operating revenue is not repeated). As a result, we think it may well be the case that Shan Xi Hua Yang Group New EnergyLtd's underlying earnings power is lower than its statutory profit. But on the bright side, its earnings per share have grown at an extremely impressive rate over the last three years. 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. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. You'd be interested to know, that we found 1 warning sign for Shan Xi Hua Yang Group New EnergyLtd and you'll want to know about it.

This note has only looked at a single factor that sheds light on the nature of Shan Xi Hua Yang Group New EnergyLtd's profit. But there is always more to discover if you are capable of focussing your mind on minutiae. 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 that insiders are buying 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.