We Think China Sanjiang Fine Chemicals' (HKG:2198) Robust Earnings Are Conservative

The subdued stock price reaction suggests that China Sanjiang Fine Chemicals Company Limited's (HKG:2198) strong earnings didn't offer any surprises. Investors are probably missing some underlying factors which are encouraging for the future of the company.

Check out our latest analysis for China Sanjiang Fine Chemicals

How Do Unusual Items Influence Profit?

To properly understand China Sanjiang Fine Chemicals' profit results, we need to consider the CN¥263m expense attributed to unusual items. 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, after all, that's exactly what the accounting terminology implies. If China Sanjiang Fine Chemicals 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 China Sanjiang Fine Chemicals.

Our Take On China Sanjiang Fine Chemicals' Profit Performance

Because unusual items detracted from China Sanjiang Fine Chemicals' earnings over the last year, you could argue that we can expect an improved result in the current quarter. Because of this, we think China Sanjiang Fine Chemicals' earnings potential is at least as good as it seems, and maybe even better! And one can definitely find a positive in the fact that it made a profit this year, despite losing money last year. At the end of the day, it's essential to consider more than just the factors above, if you want to understand the company properly. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. For instance, we've identified 3 warning signs for China Sanjiang Fine Chemicals (2 don't sit too well with us) you should be familiar with.

This note has only looked at a single factor that sheds light on the nature of China Sanjiang Fine Chemicals' 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. 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.