Narasaki Sangyo's (TSE:8085) Problems Go Beyond Weak Profit

Investors were disappointed by Narasaki Sangyo Co., Ltd.'s (TSE:8085 ) latest earnings release. We did some analysis, and found that there are some reasons to be cautious about the headline numbers.

Check out our latest analysis for Narasaki Sangyo

The Impact Of Unusual Items On Profit

To properly understand Narasaki Sangyo's profit results, we need to consider the JP¥267m gain attributed to unusual items. While it's always nice to have higher profit, a large contribution from unusual items sometimes dampens our enthusiasm. When we crunched the numbers on thousands of publicly listed companies, we found that a boost from unusual items in a given year is often not repeated the next year. And that's as you'd expect, given these boosts are described as 'unusual'. If Narasaki Sangyo doesn't see that contribution repeat, then all else being equal we'd expect its profit to drop over the current year.

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

Our Take On Narasaki Sangyo's Profit Performance

Arguably, Narasaki Sangyo's statutory earnings have been distorted by unusual items boosting profit. Therefore, it seems possible to us that Narasaki Sangyo's true underlying earnings power is actually less than its statutory profit. But at least holders can take some solace from the 44% per annum growth in EPS for the last three. 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 Narasaki Sangyo at this point in time. While conducting our analysis, we found that Narasaki Sangyo has 1 warning sign and it would be unwise to ignore this.

This note has only looked at a single factor that sheds light on the nature of Narasaki Sangyo's profit. But there are plenty of other ways to inform your opinion of a company. 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.