Wuhan Fingu Electronic Technology's (SZSE:002194) Sluggish Earnings Might Be Just The Beginning Of Its Problems

The market wasn't impressed with the soft earnings from Wuhan Fingu Electronic Technology Co., LTD. (SZSE:002194) recently. We did some further digging and think they have a few more reasons to be concerned beyond the statutory profit.

Check out our latest analysis for Wuhan Fingu Electronic Technology

How Do Unusual Items Influence Profit?

To properly understand Wuhan Fingu Electronic Technology's profit results, we need to consider the CN¥1.6m gain attributed to 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. Assuming those unusual items don't show up again in the current year, we'd thus expect profit to be weaker next year (in the absence of business growth, that is).

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Wuhan Fingu Electronic Technology.

An Unusual Tax Situation

Having already discussed the impact of the unusual items, we should also note that Wuhan Fingu Electronic Technology received a tax benefit of CN¥2.6m. This is meaningful because companies usually pay tax rather than receive tax benefits. We're sure the company was pleased with its tax benefit. However, our data indicates that tax benefits can temporarily boost statutory profit in the year it is booked, but subsequently profit may fall back. 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. While we think it's good that the company has booked a tax benefit, it does mean that there's every chance the statutory profit will come in a lot higher than it would be if the income was adjusted for one-off factors.

Our Take On Wuhan Fingu Electronic Technology's Profit Performance

In its last report Wuhan Fingu Electronic Technology received a tax benefit which might make its profit look better than it really is on a underlying level. Furthermore, it also benefitted from a positive unusual item, which boosted the profit result even higher. Considering all this we'd argue Wuhan Fingu Electronic Technology's profits probably give an overly generous impression of its sustainable level of profitability. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. Every company has risks, and we've spotted 3 warning signs for Wuhan Fingu Electronic Technology (of which 2 can't be ignored!) you should know about.

Our examination of Wuhan Fingu Electronic Technology has focussed on certain factors that can make its earnings look better than they are. And, on that basis, we are somewhat skeptical. 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. 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.