Are Sun Messe's (TYO:7883) Statutory Earnings A Good Guide To Its Underlying Profitability?

Many investors consider it preferable to invest in profitable companies over unprofitable ones, because profitability suggests a business is sustainable. However, sometimes companies receive a one-off boost (or reduction) to their profit, and it's not always clear whether statutory profits are a good guide, going forward. This article will consider whether Sun Messe's (TYO:7883) statutory profits are a good guide to its underlying earnings.

We like the fact that Sun Messe made a profit of JP¥163.0m on its revenue of JP¥15.0b, in the last year. Interestingly, even though its revenue has been flat over the last few years, its profit has actually increased, as you can see, below.

View our latest analysis for Sun Messe

Not all profits are equal, and we can learn more about the nature of a company's past profitability by diving deeper into the financial statements. This article will focus on the impact unusual items have had on Sun Messe's statutory earnings. Note: we always recommend investors check balance sheet strength. Click here to be taken to our balance sheet analysis of Sun Messe.

The Impact Of Unusual Items On Profit

For anyone who wants to understand Sun Messe's profit beyond the statutory numbers, it's important to note that during the last twelve months statutory profit was reduced by JP¥27m due to unusual items. While deductions due to unusual items are disappointing in the first instance, there is a silver lining. 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. Assuming those unusual expenses don't come up again, we'd therefore expect Sun Messe to produce a higher profit next year, all else being equal.

Our Take On Sun Messe's Profit Performance

Because unusual items detracted from Sun Messe'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 Sun Messe's statutory profit actually understates its earnings potential! Better yet, its EPS are growing strongly, which is nice to see. 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 Sun Messe at this point in time. You'd be interested to know, that we found 2 warning signs for Sun Messe and you'll want to know about these.

Today we've zoomed in on a single data point to better understand the nature of Sun Messe'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. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.

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This article by Simply Wall St is general in nature. 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.
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