Some Investors May Be Willing To Look Past Chongqing Yukaifa's (SZSE:000514) Soft Earnings

The market was pleased with the recent earnings report from Chongqing Yukaifa Co., Ltd (SZSE:000514), despite the profit numbers being soft. Our analysis suggests that investors may have noticed some promising signs beyond the statutory profit figures.

See our latest analysis for Chongqing Yukaifa

How Do Unusual Items Influence Profit?

Importantly, our data indicates that Chongqing Yukaifa's profit was reduced by CN¥61m, due to unusual items, over the last year. 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, after all, that's exactly what the accounting terminology implies. If Chongqing Yukaifa doesn't see those unusual expenses repeat, then all else being equal we'd expect its profit to increase over the coming year.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Chongqing Yukaifa.

Our Take On Chongqing Yukaifa's Profit Performance

Unusual items (expenses) detracted from Chongqing Yukaifa's earnings over the last year, but we might see an improvement next year. Based on this observation, we consider it likely that Chongqing Yukaifa's statutory profit actually understates its earnings potential! Unfortunately, though, its earnings per share actually fell back over the 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 Chongqing Yukaifa at this point in time. Be aware that Chongqing Yukaifa is showing 3 warning signs in our investment analysis and 1 of those can't be ignored...

Today we've zoomed in on a single data point to better understand the nature of Chongqing Yukaifa's profit. But there is always more to discover if you are capable of focussing your mind on minutiae. 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.