Chongqing Machinery & Electric's (HKG:2722) Solid Profits Have Weak Fundamentals

Despite announcing strong earnings, Chongqing Machinery & Electric Co., Ltd.'s (HKG:2722) stock was sluggish. We think that the market might be paying attention to some underlying factors that they find to be concerning.

How Do Unusual Items Influence Profit?

To properly understand Chongqing Machinery & Electric's profit results, we need to consider the CN¥46m gain attributed to 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 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'. We can see that Chongqing Machinery & Electric's positive unusual items were quite significant relative to its profit in the year to December 2024. As a result, we can surmise that the unusual items are making its statutory profit significantly stronger 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 Chongqing Machinery & Electric.

Our Take On Chongqing Machinery & Electric's Profit Performance

As previously mentioned, Chongqing Machinery & Electric's large boost from unusual items won't be there indefinitely, so its statutory earnings are probably a poor guide to its underlying profitability. For this reason, we think that Chongqing Machinery & Electric's statutory profits may be a bad guide to its underlying earnings power, and might give investors an overly positive impression of the company. But at least holders can take some solace from the 50% per annum growth in EPS for the last three. The goal of this article has been to assess how well we can rely on the statutory earnings to reflect the company's potential, but there is plenty more to consider. If you'd like to know more about Chongqing Machinery & Electric as a business, it's important to be aware of any risks it's facing. For instance, we've identified 2 warning signs for Chongqing Machinery & Electric (1 shouldn't be ignored) you should be familiar with.

This note has only looked at a single factor that sheds light on the nature of Chongqing Machinery & Electric's profit. But there is always more to discover if you are capable of focussing your mind on minutiae. Some people consider a high return on equity to be a good sign of a quality business. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks with high insider ownership.

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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.