We Think That There Are More Issues For Foshan NationStar OptoelectronicsLtd (SZSE:002449) Than Just Sluggish Earnings

The recent earnings release from Foshan NationStar Optoelectronics Co.,Ltd (SZSE:002449 ) was disappointing to investors. We looked deeper and believe that there is even more to be worried about, beyond the soft profit numbers.

View our latest analysis for Foshan NationStar OptoelectronicsLtd

The Impact Of Unusual Items On Profit

For anyone who wants to understand Foshan NationStar OptoelectronicsLtd's profit beyond the statutory numbers, it's important to note that during the last twelve months statutory profit gained from CN¥42m 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 analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. Which is hardly surprising, given the name. Foshan NationStar OptoelectronicsLtd had a rather significant contribution from unusual items relative to its profit to December 2023. 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 Foshan NationStar OptoelectronicsLtd.

An Unusual Tax Situation

Having already discussed the impact of the unusual items, we should also note that Foshan NationStar OptoelectronicsLtd received a tax benefit of CN¥3.4m. It's always a bit noteworthy when a company is paid by the tax man, rather than paying the tax man. The receipt of a tax benefit is obviously a good thing, on its own. However, our data indicates that tax benefits can temporarily boost statutory profit in the year it is booked, but subsequently profit may fall back. Assuming the tax benefit is not repeated every year, we could see its profitability drop noticeably, all else being equal.

Our Take On Foshan NationStar OptoelectronicsLtd's Profit Performance

In its last report Foshan NationStar OptoelectronicsLtd received a tax benefit which might make its profit look better than it really is on a underlying level. 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. Considering all this we'd argue Foshan NationStar OptoelectronicsLtd's profits probably give an overly generous impression of its sustainable level of profitability. If you'd like to know more about Foshan NationStar OptoelectronicsLtd as a business, it's important to be aware of any risks it's facing. For instance, we've identified 3 warning signs for Foshan NationStar OptoelectronicsLtd (1 doesn't sit too well with us) you should be familiar with.

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 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.