Shanghai Haixin Group Co., Ltd.'s (SHSE:600851) healthy profit numbers didn't contain any surprises for investors. We believe that shareholders have noticed some concerning factors beyond the statutory profit numbers.

See our latest analysis for Shanghai Haixin Group

The Power Of Non-Operating Revenue

At most companies, some revenue streams, such as government grants, are accounted for as non-operating revenue, while the core business is said to produce operating revenue. Oftentimes, non-operating revenue spikes are not repeated, so it makes sense to be cautious where non-operating revenue has made a very large contribution to total profit. Importantly, the non-operating revenue often comes without associated ongoing costs, so it can boost profit by letting it fall straight to the bottom line, making the operating business seem better than it really is. Notably, Shanghai Haixin Group had a significant increase in non-operating revenue over the last year. Indeed, its non-operating revenue rose from CN¥80.8m last year to CN¥308.2m this year. If that non-operating revenue fails to manifest in the current year, then there's a real risk the bottom line profit result will be impacted negatively. In order to better understand a company's profit result, it can sometimes help to consider whether the result would be very different without a sudden increase in non-operating revenue.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Shanghai Haixin Group.

How Do Unusual Items Influence Profit?

Alongside that spike in non-operating revenue, it's also important to note that Shanghai Haixin Group'sprofit suffered from unusual items, which reduced profit by CN¥51m in the last twelve months. While deductions due to unusual items are disappointing in the first instance, there is a silver lining. 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. In the twelve months to December 2021, Shanghai Haixin Group had a big unusual items expense. All else being equal, this would likely have the effect of making the statutory profit look worse than its underlying earnings power.

Our Take On Shanghai Haixin Group's Profit Performance

In the last year Shanghai Haixin Group's non-operating revenue really gave it a boost, but not in a way that is necessarily going to be sustained. But on the other hand, it also saw an unusual item depress its profit, suggesting the statutory profit number will actually improve next year, if the unusual expenses are not repeated, and all else stays equal. Given the contrasting considerations, we don't have a strong view as to whether Shanghai Haixin Group's profits are an apt reflection of its underlying potential for profit. In light of this, if you'd like to do more analysis on the company, it's vital to be informed of the risks involved. In terms of investment risks, we've identified 3 warning signs with Shanghai Haixin Group, and understanding these should be part of your investment process.

Our examination of Shanghai Haixin Group has focussed on certain factors that can make its earnings look better than they are. 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 that insiders are buying.

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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.