Telink Semiconductor(Shanghai)Co.Ltd's (SHSE:688591) Earnings Might Not Be As Promising As They Seem

Telink Semiconductor(Shanghai)Co.,Ltd. (SHSE:688591) posted some decent earnings, but shareholders didn't react strongly. Our analysis has found some concerning factors which weaken the profit's foundation.

Check out our latest analysis for Telink Semiconductor(Shanghai)Co.Ltd

The Impact Of Unusual Items On Profit

Importantly, our data indicates that Telink Semiconductor(Shanghai)Co.Ltd's profit received a boost of CN¥16m in unusual items, over the last year. 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 that's as you'd expect, given these boosts are described as 'unusual'. We can see that Telink Semiconductor(Shanghai)Co.Ltd's positive unusual items were quite significant relative to its profit in the year to September 2024. All else being equal, this would likely have the effect of making the statutory profit a poor guide to underlying earnings power.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Telink Semiconductor(Shanghai)Co.Ltd.

An Unusual Tax Situation

Just as we noted the unusual items, we must inform you that Telink Semiconductor(Shanghai)Co.Ltd received a tax benefit which contributed CN¥2.5m to the bottom line. 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 Telink Semiconductor(Shanghai)Co.Ltd's Profit Performance

In the last year Telink Semiconductor(Shanghai)Co.Ltd 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. Furthermore, it also benefitted from a positive unusual item, which boosted the profit result even higher. For the reasons mentioned above, we think that a perfunctory glance at Telink Semiconductor(Shanghai)Co.Ltd's statutory profits might make it look better than it really is on an underlying level. If you want to do dive deeper into Telink Semiconductor(Shanghai)Co.Ltd, you'd also look into what risks it is currently facing. In terms of investment risks, we've identified 1 warning sign with Telink Semiconductor(Shanghai)Co.Ltd, and understanding this should be part of your investment process.

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. 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.