Investors Shouldn't Be Too Comfortable With Toa Road's (TSE:1882) Earnings

Despite announcing strong earnings, Toa Road Corporation's (TSE:1882) stock was sluggish. Our analysis uncovered some concerning factors that we believe the market might be paying attention to.

We've discovered 2 warning signs about Toa Road. View them for free.

How Do Unusual Items Influence Profit?

For anyone who wants to understand Toa Road's profit beyond the statutory numbers, it's important to note that during the last twelve months statutory profit gained from JP¥1.0b worth of unusual items. While it's always nice to have higher profit, a large contribution from unusual items sometimes dampens our enthusiasm. We ran the numbers on most publicly listed companies worldwide, and it's very common for unusual items to be once-off in nature. And, after all, that's exactly what the accounting terminology implies. 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 Toa Road.

Our Take On Toa Road's Profit Performance

Arguably, Toa Road's statutory earnings have been distorted by unusual items boosting profit. Therefore, it seems possible to us that Toa Road's true underlying earnings power is actually less than its statutory profit. But at least holders can take some solace from the 17% per annum growth in EPS for the last three. 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. So while earnings quality is important, it's equally important to consider the risks facing Toa Road at this point in time. You'd be interested to know, that we found 2 warning signs for Toa Road and you'll want to know about these.

Today we've zoomed in on a single data point to better understand the nature of Toa Road'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 with high insider ownership.

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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.