ZheJiang KangLongDa Special Protection Technology Co., Ltd's (SHSE:603665) earnings announcement last week was disappointing for investors, despite the decent profit numbers. We have done some analysis and have found some comforting factors beneath the profit numbers.

See our latest analysis for ZheJiang KangLongDa Special Protection Technology

The Impact Of Unusual Items On Profit

To properly understand ZheJiang KangLongDa Special Protection Technology's profit results, we need to consider the CN¥76m expense attributed to unusual items. While deductions due to unusual items are disappointing in the first instance, there is a silver lining. 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. ZheJiang KangLongDa Special Protection Technology took a rather significant hit from unusual items in the year to June 2023. As a result, we can surmise that the unusual items made its statutory profit significantly weaker 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 ZheJiang KangLongDa Special Protection Technology.

An Unusual Tax Situation

Having already discussed the impact of the unusual items, we should also note that ZheJiang KangLongDa Special Protection Technology received a tax benefit of CN¥18m. 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. And given that it lost money last year, it seems possible that the benefit is evidence that it now expects to find value in its past tax losses. However, our data indicates that tax benefits can temporarily boost statutory profit in the year it is booked, but subsequently profit may fall back. Assuming the tax benefit is not repeated every year, we could see its profitability drop noticeably, all else being equal. While we think it's good that the company has booked a tax benefit, it does mean that there's every chance the statutory profit will come in a lot higher than it would be if the income was adjusted for one-off factors.

Our Take On ZheJiang KangLongDa Special Protection Technology's Profit Performance

In the last year ZheJiang KangLongDa Special Protection Technology 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. Having said that, it also had a unusual item reducing its profit. Based on these factors, we think that ZheJiang KangLongDa Special Protection Technology's profits are a reasonably conservative guide to its underlying profitability. If you'd like to know more about ZheJiang KangLongDa Special Protection Technology as a business, it's important to be aware of any risks it's facing. Case in point: We've spotted 4 warning signs for ZheJiang KangLongDa Special Protection Technology you should be mindful of and 2 of these are potentially serious.

In this article we've looked at a number of factors that can impair the utility of profit numbers, as a guide to a business. But there are plenty of other ways to inform your opinion of a company. 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.