Sumitomo's (TSE:8053) Earnings Are Of Questionable Quality

Last week's profit announcement from Sumitomo Corporation (TSE:8053) was underwhelming for investors, despite headline numbers being robust. Our analysis uncovered some concerning factors that we believe the market might be paying attention to.

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How Do Unusual Items Influence Profit?

For anyone who wants to understand Sumitomo's profit beyond the statutory numbers, it's important to note that during the last twelve months statutory profit gained from JP¥62b worth of unusual items. We can't deny that higher profits generally leave us optimistic, but we'd prefer it if the profit were to be sustainable. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. And that's as you'd expect, given these boosts are described as 'unusual'. If Sumitomo doesn't see that contribution repeat, then all else being equal we'd expect its profit to drop over the current 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 Sumitomo's Profit Performance

Arguably, Sumitomo's statutory earnings have been distorted by unusual items boosting profit. Because of this, we think that it may be that Sumitomo's statutory profits are better than its underlying earnings power. Nonetheless, it's still worth noting that its earnings per share have grown at 9.9% over the last three years. 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. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. In terms of investment risks, we've identified 2 warning signs with Sumitomo, and understanding them should be part of your investment process.

This note has only looked at a single factor that sheds light on the nature of Sumitomo's 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. 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.