Earnings Troubles May Signal Larger Issues for Shanghai Fudan-Zhangjiang Bio-PharmaceuticalLtd (HKG:1349) Shareholders

A lackluster earnings announcement from Shanghai Fudan-Zhangjiang Bio-Pharmaceutical Co.,Ltd. (HKG:1349) last week didn't sink the stock price. However, we believe that investors should be aware of some underlying factors which may be of concern.

View our latest analysis for Shanghai Fudan-Zhangjiang Bio-PharmaceuticalLtd

How Do Unusual Items Influence Profit?

Importantly, our data indicates that Shanghai Fudan-Zhangjiang Bio-PharmaceuticalLtd's profit received a boost of CN¥17m in unusual items, over the last year. 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. Which is hardly surprising, given the name. We can see that Shanghai Fudan-Zhangjiang Bio-PharmaceuticalLtd's positive unusual items were quite significant relative to its profit in the year to March 2024. All else being equal, this would likely have the effect of making the statutory profit a poor guide to underlying earnings power.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Shanghai Fudan-Zhangjiang Bio-PharmaceuticalLtd.

An Unusual Tax Situation

Just as we noted the unusual items, we must inform you that Shanghai Fudan-Zhangjiang Bio-PharmaceuticalLtd received a tax benefit which contributed CN¥5.2m to the bottom line. This is of course a bit out of the ordinary, given it is more common for companies to be paying tax than receiving tax benefits! The receipt of a tax benefit is obviously a good thing, on its own. 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 Shanghai Fudan-Zhangjiang Bio-PharmaceuticalLtd's Profit Performance

In the last year Shanghai Fudan-Zhangjiang Bio-PharmaceuticalLtd received a tax benefit, which boosted its profit in a way that might not be much more sustainable than turning prime farmland into gas fields. Furthermore, it also benefitted from a positive unusual item, which boosted the profit result even higher. For the reasons mentioned above, we think that a perfunctory glance at Shanghai Fudan-Zhangjiang Bio-PharmaceuticalLtd's statutory profits might make it look better than it really is on an underlying level. Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. Be aware that Shanghai Fudan-Zhangjiang Bio-PharmaceuticalLtd is showing 3 warning signs in our investment analysis and 1 of those is a bit unpleasant...

Our examination of Shanghai Fudan-Zhangjiang Bio-PharmaceuticalLtd has focussed on certain factors that can make its earnings look better than they are. And, on that basis, we are somewhat skeptical. But there is always more to discover if you are capable of focussing your mind on minutiae. 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.