Why LanZhou Foci PharmaceuticalLtd's (SZSE:002644) Shaky Earnings Are Just The Beginning Of Its Problems

The subdued market reaction suggests that LanZhou Foci Pharmaceutical Co.,Ltd.'s (SZSE:002644) recent earnings didn't contain any surprises. However, we believe that investors should be aware of some underlying factors which may be of concern.

Check out our latest analysis for LanZhou Foci PharmaceuticalLtd

How Do Unusual Items Influence Profit?

For anyone who wants to understand LanZhou Foci PharmaceuticalLtd's profit beyond the statutory numbers, it's important to note that during the last twelve months statutory profit gained from CN¥6.6m 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. 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. If LanZhou Foci PharmaceuticalLtd doesn't see that contribution repeat, then all else being equal we'd expect its profit to drop over the current year.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of LanZhou Foci PharmaceuticalLtd.

Our Take On LanZhou Foci PharmaceuticalLtd's Profit Performance

Arguably, LanZhou Foci PharmaceuticalLtd's statutory earnings have been distorted by unusual items boosting profit. Because of this, we think that it may be that LanZhou Foci PharmaceuticalLtd's statutory profits are better than its underlying earnings power. 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. Be aware that LanZhou Foci PharmaceuticalLtd is showing 2 warning signs in our investment analysis and 1 of those shouldn't be ignored...

This note has only looked at a single factor that sheds light on the nature of LanZhou Foci PharmaceuticalLtd'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. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks with high insider ownership.

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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.