Statutory Profit Doesn't Reflect How Good Howa Machinery's (TSE:6203) Earnings Are

Investors were underwhelmed by the solid earnings posted by Howa Machinery, Ltd. (TSE:6203) recently. We have done some analysis and have found some comforting factors beneath the profit numbers.

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How Do Unusual Items Influence Profit?

For anyone who wants to understand Howa Machinery's profit beyond the statutory numbers, it's important to note that during the last twelve months statutory profit was reduced by JP¥138m due to unusual items. While deductions due to unusual items are disappointing in the first instance, there is a silver lining. We looked at thousands of listed companies and found that unusual items are very often one-off in nature. And, after all, that's exactly what the accounting terminology implies. If Howa Machinery doesn't see those unusual expenses repeat, then all else being equal we'd expect its profit to increase over the coming year.

That might leave you wondering what analysts are forecasting in terms of future profitability. Luckily, you can click here to see an interactive graph depicting future profitability, based on their estimates.

Our Take On Howa Machinery's Profit Performance

Unusual items (expenses) detracted from Howa Machinery's earnings over the last year, but we might see an improvement next year. Based on this observation, we consider it likely that Howa Machinery's statutory profit actually understates its earnings potential! And it's also positive that the company showed enough improvement to book a profit this year, after losing money 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. If you want to do dive deeper into Howa Machinery, you'd also look into what risks it is currently facing. Every company has risks, and we've spotted 2 warning signs for Howa Machinery (of which 1 makes us a bit uncomfortable!) you should know about.

Today we've zoomed in on a single data point to better understand the nature of Howa Machinery's profit. But there are plenty of other ways to inform your opinion of a company. Some people consider a high return on equity to be a good sign of a quality business. 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 with significant insider holdings 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.