Zhejiang Huamei Holding's (SZSE:000607) Weak Earnings May Only Reveal A Part Of The Whole Picture

A lackluster earnings announcement from Zhejiang Huamei Holding CO., LTD. (SZSE:000607) last week didn't sink the stock price. Our analysis suggests that along with soft profit numbers, investors should be aware of some other underlying weaknesses in the numbers.

View our latest analysis for Zhejiang Huamei Holding

How Do Unusual Items Influence Profit?

For anyone who wants to understand Zhejiang Huamei Holding's profit beyond the statutory numbers, it's important to note that during the last twelve months statutory profit gained from CN¥5.6m 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. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. 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 Zhejiang Huamei Holding.

Our Take On Zhejiang Huamei Holding's Profit Performance

Arguably, Zhejiang Huamei Holding's statutory earnings have been distorted by unusual items boosting profit. Because of this, we think that it may be that Zhejiang Huamei Holding'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. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. While conducting our analysis, we found that Zhejiang Huamei Holding has 1 warning sign and it would be unwise to ignore this.

Today we've zoomed in on a single data point to better understand the nature of Zhejiang Huamei Holding's profit. 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.