Anhui Shenjian New MaterialsLtd's (SZSE:002361) Sluggish Earnings Might Be Just The Beginning Of Its Problems

A lackluster earnings announcement from Anhui Shenjian New Materials Co.,Ltd (SZSE:002361) last week didn't sink the stock price. However, we believe that investors should be aware of some underlying factors which may be of concern.

See our latest analysis for Anhui Shenjian New MaterialsLtd

An Unusual Tax Situation

Anhui Shenjian New MaterialsLtd reported a tax benefit of CN¥7.8m, which is well worth noting. This is meaningful because companies usually pay tax rather than receive 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. So while we think it's great to receive a tax benefit, it does tend to imply an increased risk that the statutory profit overstates the sustainable earnings power of the business.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Anhui Shenjian New MaterialsLtd.

Our Take On Anhui Shenjian New MaterialsLtd's Profit Performance

As we have already discussed Anhui Shenjian New MaterialsLtd reported that it received a tax benefit, rather than paying tax, in the last year. As a result we don't think its profit result, which includes that tax-boost, is a good guide to its sustainable profit levels. Because of this, we think that it may be that Anhui Shenjian New MaterialsLtd's statutory profits are better than its underlying earnings power. In further bad news, its earnings per share decreased in the last year. The goal of this article has been to assess how well we can rely on the statutory earnings to reflect the company's potential, but there is plenty more to consider. If you want to do dive deeper into Anhui Shenjian New MaterialsLtd, you'd also look into what risks it is currently facing. Case in point: We've spotted 3 warning signs for Anhui Shenjian New MaterialsLtd you should be mindful of and 2 of these can't be ignored.

Today we've zoomed in on a single data point to better understand the nature of Anhui Shenjian New MaterialsLtd'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 that insiders are buying to be useful.

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.