Nanjing Xinlian Electronics (SZSE:002546) Is Posting Promising Earnings But The Good News Doesn’t Stop There

Despite posting healthy earnings, Nanjing Xinlian Electronics Co., Ltd's (SZSE:002546 ) stock has been quite weak. Our analysis suggests that there are some reasons for hope that investors should be aware of.

Check out our latest analysis for Nanjing Xinlian Electronics

How Do Unusual Items Influence Profit?

Importantly, our data indicates that Nanjing Xinlian Electronics' profit was reduced by CN¥67m, due to unusual items, over the last year. It's never great to see unusual items costing the company profits, but on the upside, things might improve sooner rather than later. 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. In the twelve months to December 2023, Nanjing Xinlian Electronics had a big unusual items expense. All else being equal, this would likely have the effect of making the statutory profit look worse than its underlying earnings power.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Nanjing Xinlian Electronics.

An Unusual Tax Situation

Having already discussed the impact of the unusual items, we should also note that Nanjing Xinlian Electronics received a tax benefit of CN¥11m. It's always a bit noteworthy when a company is paid by the tax man, rather than paying the tax man. We're sure the company was pleased with its 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. Assuming the tax benefit is not repeated every year, we could see its profitability drop noticeably, all else being equal.

Our Take On Nanjing Xinlian Electronics' Profit Performance

In the last year Nanjing Xinlian Electronics 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. But on the other hand, it also saw an unusual item depress its profit. Based on these factors, we think that Nanjing Xinlian Electronics' profits are a reasonably conservative guide to its underlying profitability. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. For example, Nanjing Xinlian Electronics has 3 warning signs (and 2 which don't sit too well with us) we think you should know about.

In this article we've looked at a number of factors that can impair the utility of profit numbers, as a guide to a business. 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.

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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.