Ningbo Changhong Polymer Scientific and Technical's (SHSE:605008) Earnings Quality Is Low

Shareholders didn't appear too concerned by Ningbo Changhong Polymer Scientific and Technical Inc.'s (SHSE:605008) weak earnings. We did some digging, and we believe that investors are missing some worrying factors underlying the profit figures.

View our latest analysis for Ningbo Changhong Polymer Scientific and Technical

The Power Of Non-Operating Revenue

Most companies divide classify their revenue as either 'operating revenue', which comes from normal operations, and other revenue, which could include government grants, for example. 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. Notably, Ningbo Changhong Polymer Scientific and Technical had a significant increase in non-operating revenue over the last year. In fact, our data indicates that non-operating revenue increased from -CN¥154.9m to CN¥10.7m. The high levels of non-operating revenue are problematic because if (and when) they do not repeat, then overall revenue (and profitability) of the firm will fall. 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.

How Do Unusual Items Influence Profit?

Alongside that spike in non-operating revenue, it's also important to note that Ningbo Changhong Polymer Scientific and Technical'sprofit was boosted by unusual items worth CN¥99m in the last twelve months. 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. Which is hardly surprising, given the name. Ningbo Changhong Polymer Scientific and Technical had a rather significant contribution from unusual items relative to its profit to June 2024. All else being equal, this would likely have the effect of making the statutory profit a poor guide to underlying earnings power.

Our Take On Ningbo Changhong Polymer Scientific and Technical's Profit Performance

In its last report Ningbo Changhong Polymer Scientific and Technical benefitted from a spike in non-operating revenue which may have boosted its profit in a way that may be no more sustainable than low quality coal mining. And on top of that, it also saw an unusual item boost its profit, suggesting that next year might see a lower profit number, if these events are not repeated and everything else is equal. On reflection, the above-mentioned factors give us the strong impression that Ningbo Changhong Polymer Scientific and Technical'sunderlying earnings power is not as good as it might seem, based on the statutory profit numbers. If you want to do dive deeper into Ningbo Changhong Polymer Scientific and Technical, you'd also look into what risks it is currently facing. Be aware that Ningbo Changhong Polymer Scientific and Technical is showing 4 warning signs in our investment analysis and 2 of those are concerning...

Our examination of Ningbo Changhong Polymer Scientific and Technical has focussed on certain factors that can make its earnings look better than they are. And, on that basis, we are somewhat skeptical. 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. 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.