Asaka Industrial's (TSE:5962) Solid Earnings May Rest On Weak Foundations

Asaka Industrial Co., Ltd.'s (TSE:5962 ) stock didn't jump after it announced some healthy earnings. Our analysis showed that there are some concerning factors in the earnings that investors may be cautious of.

See our latest analysis for Asaka Industrial

How Do Unusual Items Influence Profit?

Importantly, our data indicates that Asaka Industrial's profit received a boost of JP¥63m in unusual items, over the last year. 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. Which is hardly surprising, given the name. If Asaka Industrial 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 Asaka Industrial.

Our Take On Asaka Industrial's Profit Performance

Arguably, Asaka Industrial's statutory earnings have been distorted by unusual items boosting profit. Therefore, it seems possible to us that Asaka Industrial's true underlying earnings power is actually less than its statutory profit. But the good news is that its EPS growth over the last three years has been very impressive. 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 Asaka Industrial at this point in time. In terms of investment risks, we've identified 1 warning sign with Asaka Industrial, and understanding it should be part of your investment process.

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