There May Be Underlying Issues With The Quality Of YouYou Foods' (SHSE:603697) Earnings

Despite posting some strong earnings, the market for YouYou Foods Co., Ltd.'s (SHSE:603697) stock hasn't moved much. We did some digging, and we found some concerning factors in the details.

The Impact Of Unusual Items On Profit

To properly understand YouYou Foods' profit results, we need to consider the CN¥19m 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. If YouYou Foods 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 YouYou Foods' Profit Performance

Arguably, YouYou Foods' statutory earnings have been distorted by unusual items boosting profit. Therefore, it seems possible to us that YouYou Foods' true underlying earnings power is actually less than its statutory profit. But at least holders can take some solace from the 37% EPS growth in the last year. 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. So while earnings quality is important, it's equally important to consider the risks facing YouYou Foods at this point in time. While conducting our analysis, we found that YouYou Foods has 2 warning signs and it would be unwise to ignore these bad boys.

Today we've zoomed in on a single data point to better understand the nature of YouYou Foods' profit. But there is always more to discover if you are capable of focussing your mind on minutiae. 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.