Some May Be Optimistic About Ningbo Zhongbai's (SHSE:600857) Earnings

A lackluster earnings announcement from Ningbo Zhongbai Co., Ltd. (SHSE:600857) 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 Ningbo Zhongbai

Operating Revenue Or Not?

Most companies divide classify their revenue as either 'operating revenue', which comes from normal operations, and other revenue, which could include government grants, for example. Where possible, we prefer rely on operating revenue to get a better understanding of how the business is functioning. Importantly, the non-operating revenue often comes without associated ongoing costs, so it can boost profit by letting it fall straight to the bottom line, making the operating business seem better than it really is. Notably, Ningbo Zhongbai had a significant increase in non-operating revenue over the last year. In fact, our data indicates that non-operating revenue increased from CN¥6.37m to CN¥215.2m. The high levels of non-operating revenue are problematic because if (and when) they do not repeat, then overall revenue (and profitability) of the firm will fall. In order to better understand a company's profit result, it can sometimes help to consider whether the result would be very different without a sudden increase in non-operating revenue.

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

The Impact Of Unusual Items On Profit

Alongside that spike in non-operating revenue, it's also important to note that Ningbo Zhongbai'sprofit suffered from unusual items, which reduced profit by CN¥106m in the last twelve months. 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. Ningbo Zhongbai took a rather significant hit from unusual items in the year to March 2024. All else being equal, this would likely have the effect of making the statutory profit look worse than its underlying earnings power.

Our Take On Ningbo Zhongbai's Profit Performance

In the last year Ningbo Zhongbai's non-operating revenue really gave it a boost, but not in a way that is necessarily going to be sustained. Having said that, it also took a hit from unusual items, which could bode well for next year, assuming the expense was one-off in nature. Given the contrasting considerations, we don't have a strong view as to whether Ningbo Zhongbai's profits are an apt reflection of its underlying potential for profit. So while earnings quality is important, it's equally important to consider the risks facing Ningbo Zhongbai at this point in time. For example, we've discovered 4 warning signs that you should run your eye over to get a better picture of Ningbo Zhongbai.

Our examination of Ningbo Zhongbai has focussed on certain factors that can make its earnings look better than they are. But there are plenty of other ways to inform your opinion of a company. 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.

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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.