CITIC Heavy Industries Co., Ltd. (SHSE:601608) announced strong profits, but the stock was stagnant. Our analysis suggests that this might be because shareholders have noticed some concerning underlying factors.

How Do Unusual Items Influence Profit?

For anyone who wants to understand CITIC Heavy Industries' profit beyond the statutory numbers, it's important to note that during the last twelve months statutory profit gained from CN¥76m worth of 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'. 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 CITIC Heavy Industries.

Our Take On CITIC Heavy Industries' Profit Performance

Arguably, CITIC Heavy Industries' statutory earnings have been distorted by unusual items boosting profit. Because of this, we think that it may be that CITIC Heavy Industries' statutory profits are better than its underlying earnings power. But the happy news is that, while acknowledging we have to look beyond the statutory numbers, those numbers are still improving, with EPS growing at a very high rate over 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 CITIC Heavy Industries at this point in time. You'd be interested to know, that we found 2 warning signs for CITIC Heavy Industries and you'll want to know about these.

Today we've zoomed in on a single data point to better understand the nature of CITIC Heavy Industries' 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 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.