China Railway Materials' (SZSE:000927) Anemic Earnings Might Be Worse Than You Think

The subdued market reaction suggests that China Railway Materials Company Limited's (SZSE:000927) recent earnings didn't contain any surprises. We think that investors are worried about some weaknesses underlying the earnings.

See our latest analysis for China Railway Materials

The Impact Of Unusual Items On Profit

For anyone who wants to understand China Railway Materials' profit beyond the statutory numbers, it's important to note that during the last twelve months statutory profit gained from CN¥64m worth of unusual items. While it's always nice to have higher profit, a large contribution from unusual items sometimes dampens our enthusiasm. 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. And that's as you'd expect, given these boosts are described as 'unusual'. 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 China Railway Materials.

Our Take On China Railway Materials' Profit Performance

Arguably, China Railway Materials' statutory earnings have been distorted by unusual items boosting profit. Because of this, we think that it may be that China Railway Materials' statutory profits are better than its underlying earnings power. In further bad news, its earnings per share decreased in the last year. Of course, we've only just scratched the surface when it comes to analysing its earnings; one could also consider margins, forecast growth, and return on investment, among other factors. So while earnings quality is important, it's equally important to consider the risks facing China Railway Materials at this point in time. While conducting our analysis, we found that China Railway Materials has 1 warning sign and it would be unwise to ignore this.

Today we've zoomed in on a single data point to better understand the nature of China Railway Materials' profit. 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.