Why NKK Switches' (TSE:6943) Shaky Earnings Are Just The Beginning Of Its Problems

The market wasn't impressed with the soft earnings from NKK Switches Co., Ltd. (TSE:6943) recently. We did some analysis, and found that there are some reasons to be cautious about the headline numbers.

See our latest analysis for NKK Switches

How Do Unusual Items Influence Profit?

For anyone who wants to understand NKK Switches' profit beyond the statutory numbers, it's important to note that during the last twelve months statutory profit gained from JP¥108m worth of unusual items. While we like to see profit increases, we tend to be a little more cautious when unusual items have made a big contribution. 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. NKK Switches had a rather significant contribution from unusual items relative to its profit 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 NKK Switches.

Our Take On NKK Switches' Profit Performance

As we discussed above, we think the significant positive unusual item makes NKK Switches' earnings a poor guide to its underlying profitability. For this reason, we think that NKK Switches' statutory profits may be a bad guide to its underlying earnings power, and might give investors an overly positive impression of the company. But the good news is that its EPS growth over the last three years has been very impressive. 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. So while earnings quality is important, it's equally important to consider the risks facing NKK Switches at this point in time. You'd be interested to know, that we found 4 warning signs for NKK Switches and you'll want to know about these.

This note has only looked at a single factor that sheds light on the nature of NKK Switches' profit. But there is always more to discover if you are capable of focussing your mind on minutiae. For example, many people consider a high return on equity as an indication of favorable business economics, while others like to 'follow the money' and search out stocks that insiders are buying. 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.