LTS' (TSE:6560) Solid Profits Have Weak Fundamentals

Despite announcing strong earnings, LTS, Inc.'s (TSE:6560) stock was sluggish. We did some digging and found some worrying underlying problems.

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The Impact Of Unusual Items On Profit

To properly understand LTS' profit results, we need to consider the JP¥196m gain attributed to 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. We ran the numbers on most publicly listed companies worldwide, and it's very common for unusual items to be once-off in nature. And, after all, that's exactly what the accounting terminology implies. Assuming those unusual items don't show up again in the current year, we'd thus expect profit to be weaker next year (in the absence of business growth, that is).

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

Our Take On LTS' Profit Performance

Arguably, LTS' statutory earnings have been distorted by unusual items boosting profit. Therefore, it seems possible to us that LTS' true underlying earnings power is actually less than its statutory profit. Nonetheless, it's still worth noting that its earnings per share have grown at 68% over the last three years. 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. If you want to do dive deeper into LTS, you'd also look into what risks it is currently facing. Case in point: We've spotted 1 warning sign for LTS you should be aware of.

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