Investors Can Find Comfort In Longyan Zhuoyue New Energy's (SHSE:688196) Earnings Quality

Longyan Zhuoyue New Energy Co., Ltd.'s (SHSE:688196) stock was strong despite it releasing a soft earnings report last week. Our analysis suggests that investors may have noticed some promising signs beyond the statutory profit figures.

See our latest analysis for Longyan Zhuoyue New Energy

How Do Unusual Items Influence Profit?

To properly understand Longyan Zhuoyue New Energy's profit results, we need to consider the CN¥31m expense attributed 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. We looked at thousands of listed companies and found that unusual items are very often one-off in nature. And that's hardly a surprise given these line items are considered unusual. Longyan Zhuoyue New Energy took a rather significant hit from unusual items in the year to March 2024. All else being equal, this would likely have the effect of making the statutory profit look worse than its underlying earnings power.

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.

An Unusual Tax Situation

Just as we noted the unusual items, we must inform you that Longyan Zhuoyue New Energy received a tax benefit which contributed CN¥1.8m to the bottom line. This is of course a bit out of the ordinary, given it is more common for companies to be paying tax than receiving tax benefits! Of course, prima facie it's great to receive a tax benefit. However, our data indicates that tax benefits can temporarily boost statutory profit in the year it is booked, but subsequently profit may fall back. Assuming the tax benefit is not repeated every year, we could see its profitability drop noticeably, all else being equal. While we think it's good that the company has booked a tax benefit, it does mean that there's every chance the statutory profit will come in a lot higher than it would be if the income was adjusted for one-off factors.

Our Take On Longyan Zhuoyue New Energy's Profit Performance

In the last year Longyan Zhuoyue New Energy received a tax benefit, which boosted its profit in a way that might not be much more sustainable than turning prime farmland into gas fields. But on the other hand, it also saw an unusual item depress its profit. Considering all the aforementioned, we'd venture that Longyan Zhuoyue New Energy's profit result is a pretty good guide to its true profitability, albeit a bit on the conservative side. If you'd like to know more about Longyan Zhuoyue New Energy as a business, it's important to be aware of any risks it's facing. You'd be interested to know, that we found 3 warning signs for Longyan Zhuoyue New Energy and you'll want to know about these.

Our examination of Longyan Zhuoyue New Energy has focussed on certain factors that can make its earnings look better than they are. 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.