ShenzhenJingQuanHua ElectronicsLtd's (SZSE:002885) Conservative Accounting Might Explain Soft Earnings

The market was pleased with the recent earnings report from ShenzhenJingQuanHua Electronics Co.,Ltd. (SZSE:002885), despite the profit numbers being soft. Our analysis suggests that investors may have noticed some promising signs beyond the statutory profit figures.

View our latest analysis for ShenzhenJingQuanHua ElectronicsLtd

The Impact Of Unusual Items On Profit

Importantly, our data indicates that ShenzhenJingQuanHua ElectronicsLtd's profit was reduced by CN¥30m, 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, ShenzhenJingQuanHua ElectronicsLtd had a big unusual items expense. As a result, we can surmise that the unusual items made its statutory profit significantly weaker 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 ShenzhenJingQuanHua ElectronicsLtd.

An Unusual Tax Situation

Just as we noted the unusual items, we must inform you that ShenzhenJingQuanHua ElectronicsLtd received a tax benefit which contributed CN¥11m to the bottom line. This is meaningful because companies usually pay tax rather than receive tax benefits. Of course, prima facie it's great to receive a 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.

Our Take On ShenzhenJingQuanHua ElectronicsLtd's Profit Performance

In its last report ShenzhenJingQuanHua ElectronicsLtd received a tax benefit which might make its profit look better than it really is on a underlying level. Having said that, it also had a unusual item reducing its profit. Considering all the aforementioned, we'd venture that ShenzhenJingQuanHua ElectronicsLtd's profit result is a pretty good guide to its true profitability, albeit a bit on the conservative side. So if you'd like to dive deeper into this stock, it's crucial to consider any risks it's facing. For example - ShenzhenJingQuanHua ElectronicsLtd has 2 warning signs we think you should be aware of.

Our examination of ShenzhenJingQuanHua ElectronicsLtd has focussed on certain factors that can make its earnings look better than they are. 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.