Why NFK Holdings' (TSE:6494) Healthy Earnings Aren’t As Good As They Seem

Solid profit numbers didn't seem to be enough to please NFK Holdings Co., Ltd.'s (TSE:6494) shareholders. Our analysis has found some concerning factors which weaken the profit's foundation.

View our latest analysis for NFK Holdings

The Impact Of Unusual Items On Profit

Importantly, our data indicates that NFK Holdings' profit received a boost of JP¥509m in unusual items, over the last year. While it's always nice to have higher profit, a large contribution from unusual items sometimes dampens our enthusiasm. 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 NFK Holdings' positive unusual items were quite significant relative to its profit in the year to March 2024. As a result, we can surmise that the unusual items are making its statutory profit significantly stronger 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 NFK Holdings.

An Unusual Tax Situation

Having already discussed the impact of the unusual items, we should also note that NFK Holdings received a tax benefit of JP¥146m. This is meaningful because companies usually pay tax rather than receive tax benefits. The receipt of a tax benefit is obviously a good thing, on its own. However, the devil in the detail is that these kind of benefits only impact in the year they are booked, and are often one-off in nature. In the likely event the tax benefit is not repeated, we'd expect to see its statutory profit levels drop, at least in the absence of strong growth.

Our Take On NFK Holdings' Profit Performance

In the last year NFK Holdings 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. Furthermore, it also benefitted from a positive unusual item, which boosted the profit result even higher. On reflection, the above-mentioned factors give us the strong impression that NFK Holdings'underlying earnings power is not as good as it might seem, based on the statutory profit numbers. If you want to do dive deeper into NFK Holdings, you'd also look into what risks it is currently facing. In terms of investment risks, we've identified 2 warning signs with NFK Holdings, and understanding these bad boys should be part of your investment process.

Our examination of NFK Holdings has focussed on certain factors that can make its earnings look better than they are. And, on that basis, we are somewhat skeptical. 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. 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.