Donglai Coating Technology(Shanghai)Co.Ltd's (SHSE:688129) Solid Profits Have Weak Fundamentals

Despite announcing strong earnings, Donglai Coating Technology(Shanghai)Co.,Ltd's (SHSE:688129) stock was sluggish. We did some digging and found some worrying underlying problems.

View our latest analysis for Donglai Coating Technology(Shanghai)Co.Ltd

How Do Unusual Items Influence Profit?

To properly understand Donglai Coating Technology(Shanghai)Co.Ltd's profit results, we need to consider the CN¥21m gain attributed to unusual items. While it's always nice to have higher profit, a large contribution from unusual items sometimes dampens our enthusiasm. 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 that's as you'd expect, given these boosts are described as 'unusual'. 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 Donglai Coating Technology(Shanghai)Co.Ltd.

Our Take On Donglai Coating Technology(Shanghai)Co.Ltd's Profit Performance

Arguably, Donglai Coating Technology(Shanghai)Co.Ltd's statutory earnings have been distorted by unusual items boosting profit. Because of this, we think that it may be that Donglai Coating Technology(Shanghai)Co.Ltd's statutory profits are better than its underlying earnings power. The silver lining is that its EPS growth over the last year has been really wonderful, even if it's not a perfect measure. 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 Donglai Coating Technology(Shanghai)Co.Ltd at this point in time. For instance, we've identified 3 warning signs for Donglai Coating Technology(Shanghai)Co.Ltd (1 shouldn't be ignored) you should be familiar with.

This note has only looked at a single factor that sheds light on the nature of Donglai Coating Technology(Shanghai)Co.Ltd'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.