Statutory Profit Doesn't Reflect How Good China Enterprise's (SHSE:600675) Earnings Are

China Enterprise Company Limited (SHSE:600675) just reported healthy earnings but the stock price didn't move much. Investors are probably missing some underlying factors which are encouraging for the future of the company.

Check out our latest analysis for China Enterprise

How Do Unusual Items Influence Profit?

For anyone who wants to understand China Enterprise's profit beyond the statutory numbers, it's important to note that during the last twelve months statutory profit was reduced by CN¥215m due to unusual items. While deductions due to unusual items are disappointing in the first instance, there is a silver lining. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. And that's hardly a surprise given these line items are considered unusual. Assuming those unusual expenses don't come up again, we'd therefore expect China Enterprise to produce a higher profit next year, all else being equal.

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.

Our Take On China Enterprise's Profit Performance

Unusual items (expenses) detracted from China Enterprise's earnings over the last year, but we might see an improvement next year. Based on this observation, we consider it likely that China Enterprise's statutory profit actually understates its earnings potential! And it's also positive that the company showed enough improvement to book a profit this year, after losing money last year. At the end of the day, it's essential to consider more than just the factors above, if you want to understand the company properly. So while earnings quality is important, it's equally important to consider the risks facing China Enterprise at this point in time. Every company has risks, and we've spotted 1 warning sign for China Enterprise you should know about.

This note has only looked at a single factor that sheds light on the nature of China Enterprise'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 that insiders are buying 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.