Guangdong Cellwise Microelectronics (SHSE:688325) Is Posting Solid Earnings, But It Is Not All Good News

Guangdong Cellwise Microelectronics Co., Ltd. (SHSE:688325) posted some decent earnings, but shareholders didn't react strongly. Our analysis suggests they may be concerned about some underlying details.

Check out our latest analysis for Guangdong Cellwise Microelectronics

How Do Unusual Items Influence Profit?

For anyone who wants to understand Guangdong Cellwise Microelectronics' profit beyond the statutory numbers, it's important to note that during the last twelve months statutory profit gained from CN¥5.8m worth of unusual items. While we like to see profit increases, we tend to be a little more cautious when unusual items have made a big contribution. When we crunched the numbers on thousands of publicly listed companies, we found that a boost from unusual items in a given year is often not repeated the next year. Which is hardly surprising, given the name. Guangdong Cellwise Microelectronics had a rather significant contribution from unusual items relative to its profit to December 2023. As a result, we can surmise that the unusual items are making its statutory profit significantly stronger than it would otherwise be.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Guangdong Cellwise Microelectronics.

An Unusual Tax Situation

Having already discussed the impact of the unusual items, we should also note that Guangdong Cellwise Microelectronics received a tax benefit of CN¥4.7m. This is of course a bit out of the ordinary, given it is more common for companies to be paying tax than receiving tax benefits! Of course, prima facie it's great to receive a tax benefit. However, the devil in the detail is that these kind of benefits only impact in the year they are booked, and are often one-off in nature. In the likely event the tax benefit is not repeated, we'd expect to see its statutory profit levels drop, at least in the absence of strong growth. So while we think it's great to receive a tax benefit, it does tend to imply an increased risk that the statutory profit overstates the sustainable earnings power of the business.

Our Take On Guangdong Cellwise Microelectronics' Profit Performance

In the last year Guangdong Cellwise Microelectronics received a tax benefit, which boosted its profit in a way that might not be much more sustainable than turning prime farmland into gas fields. And on top of that, it also saw an unusual item boost its profit, suggesting that next year might see a lower profit number, if these events are not repeated. For the reasons mentioned above, we think that a perfunctory glance at Guangdong Cellwise Microelectronics' statutory profits might make it look better than it really is on an underlying level. If you want to do dive deeper into Guangdong Cellwise Microelectronics, you'd also look into what risks it is currently facing. Case in point: We've spotted 2 warning signs for Guangdong Cellwise Microelectronics you should be mindful of and 1 of these is concerning.

In this article we've looked at a number of factors that can impair the utility of profit numbers, and we've come away cautious. But there is always more to discover if you are capable of focussing your mind on minutiae. 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. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.