Shenzhen Jove Enterprise's (SZSE:300814) Anemic Earnings Might Be Worse Than You Think

Despite Shenzhen Jove Enterprise Limited's (SZSE:300814) most recent earnings report having soft headline numbers, its stock has had a positive performance. We looked at the details, and we think that investors may be responding to some encouraging factors.

Check out our latest analysis for Shenzhen Jove Enterprise

The Impact Of Unusual Items On Profit

Importantly, our data indicates that Shenzhen Jove Enterprise's profit was reduced by CN¥5.8m, 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. We looked at thousands of listed companies and found that unusual items are very often one-off in nature. And that's hardly a surprise given these line items are considered unusual. If Shenzhen Jove Enterprise doesn't see those unusual expenses repeat, then all else being equal we'd expect its profit to increase over the coming year.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Shenzhen Jove Enterprise.

An Unusual Tax Situation

Having already discussed the impact of the unusual items, we should also note that Shenzhen Jove Enterprise received a tax benefit of CN¥7.1m. 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, 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. 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 Shenzhen Jove Enterprise's Profit Performance

In its last report Shenzhen Jove Enterprise 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. Given the contrasting considerations, we don't have a strong view as to whether Shenzhen Jove Enterprise's profits are an apt reflection of its underlying potential for profit. So while earnings quality is important, it's equally important to consider the risks facing Shenzhen Jove Enterprise at this point in time. For example, Shenzhen Jove Enterprise has 3 warning signs (and 1 which can't be ignored) 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 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 with significant insider holdings 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.