Should You Use MK Seiko's (TYO:5906) Statutory Earnings To Analyse It?

Broadly speaking, profitable businesses are less risky than unprofitable ones. That said, the current statutory profit is not always a good guide to a company's underlying profitability. Today we'll focus on whether this year's statutory profits are a good guide to understanding MK Seiko (TYO:5906).

We like the fact that MK Seiko made a profit of JP¥567.0m on its revenue of JP¥24.5b, in the last year. The chart below shows how it has grown revenue over the last three years, but that profit has declined.

See our latest analysis for MK Seiko

Of course, it is only sensible to look beyond the statutory profits and question how well those numbers represent the sustainable earnings power of the business. This article will focus on the impact unusual items have had on MK Seiko's statutory earnings. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of MK Seiko.

The Impact Of Unusual Items On Profit

For anyone who wants to understand MK Seiko's profit beyond the statutory numbers, it's important to note that during the last twelve months statutory profit was reduced by JP¥148m due 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 that's hardly a surprise given these line items are considered unusual. Assuming those unusual expenses don't come up again, we'd therefore expect MK Seiko to produce a higher profit next year, all else being equal.

Our Take On MK Seiko's Profit Performance

Unusual items (expenses) detracted from MK Seiko's earnings over the last year, but we might see an improvement next year. Because of this, we think MK Seiko's earnings potential is at least as good as it seems, and maybe even better! On the other hand, its EPS actually shrunk in the last twelve months. The goal of this article has been to assess how well we can rely on the statutory earnings to reflect the company's potential, but there is plenty more to consider. 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. For instance, we've identified 3 warning signs for MK Seiko (1 is a bit concerning) you should be familiar with.

Today we've zoomed in on a single data point to better understand the nature of MK Seiko'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. 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.
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