Why Shenzhen Cereals HoldingsLtd's (SZSE:000019) Shaky Earnings Are Just The Beginning Of Its Problems

Shenzhen Cereals Holdings Co.,Ltd.'s (SZSE:000019) recent weak earnings report didn't cause a big stock movement. Our analysis suggests that along with soft profit numbers, investors should be aware of some other underlying weaknesses in the numbers.

See our latest analysis for Shenzhen Cereals HoldingsLtd

How Do Unusual Items Influence Profit?

For anyone who wants to understand Shenzhen Cereals HoldingsLtd's profit beyond the statutory numbers, it's important to note that during the last twelve months statutory profit gained from CN¥27m worth of unusual items. We can't deny that higher profits generally leave us optimistic, but we'd prefer it if the profit were to be sustainable. We ran the numbers on most publicly listed companies worldwide, and it's very common for unusual items to be once-off in nature. And, after all, that's exactly what the accounting terminology implies. 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 Shenzhen Cereals HoldingsLtd.

Our Take On Shenzhen Cereals HoldingsLtd's Profit Performance

Arguably, Shenzhen Cereals HoldingsLtd's statutory earnings have been distorted by unusual items boosting profit. Therefore, it seems possible to us that Shenzhen Cereals HoldingsLtd's true underlying earnings power is actually less than its statutory profit. In further bad news, its earnings per share decreased 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. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. At Simply Wall St, we found 1 warning sign for Shenzhen Cereals HoldingsLtd and we think they deserve your attention.

This note has only looked at a single factor that sheds light on the nature of Shenzhen Cereals HoldingsLtd's 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. 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.