FDK's (TSE:6955) Strong Earnings Are Of Good Quality

Investors were underwhelmed by the solid earnings posted by FDK Corporation (TSE:6955) recently. Our analysis says that investors should be optimistic, as the strong profit is built on solid foundations.

See our latest analysis for FDK

The Impact Of Unusual Items On Profit

To properly understand FDK's profit results, we need to consider the JP¥419m expense attributed to unusual items. It's never great to see unusual items costing the company profits, but on the upside, things might improve sooner rather than later. 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 FDK doesn't see those unusual expenses repeat, then all else being equal we'd expect its profit to increase over the coming year.

Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of FDK.

Our Take On FDK's Profit Performance

Because unusual items detracted from FDK's earnings over the last year, you could argue that we can expect an improved result in the current quarter. Based on this observation, we consider it likely that FDK'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. 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 FDK at this point in time. For example - FDK has 3 warning signs we think you should be aware of.

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