DHC SoftwareLtd's (SZSE:002065) Shareholders Have More To Worry About Than Only Soft Earnings

A lackluster earnings announcement from DHC Software Co.,Ltd. (SZSE:002065) last week didn't sink the stock price. We think that investors are worried about some weaknesses underlying the earnings.

Check out our latest analysis for DHC SoftwareLtd

The Impact Of Unusual Items On Profit

Importantly, our data indicates that DHC SoftwareLtd's profit received a boost of CN¥136m in unusual items, over the last year. We can't deny that higher profits generally leave us optimistic, but we'd prefer it if the profit were to be sustainable. 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. We can see that DHC SoftwareLtd'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 DHC SoftwareLtd.

Our Take On DHC SoftwareLtd's Profit Performance

As previously mentioned, DHC SoftwareLtd's large boost from unusual items won't be there indefinitely, so its statutory earnings are probably a poor guide to its underlying profitability. For this reason, we think that DHC SoftwareLtd's statutory profits may be a bad guide to its underlying earnings power, and might give investors an overly positive impression of the company. In further bad news, its earnings per share decreased in the 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. If you want to do dive deeper into DHC SoftwareLtd, you'd also look into what risks it is currently facing. Every company has risks, and we've spotted 3 warning signs for DHC SoftwareLtd (of which 1 is a bit unpleasant!) you should know about.

This note has only looked at a single factor that sheds light on the nature of DHC SoftwareLtd's 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.