LEC's (TSE:7874) Solid Earnings Are Supported By Other Strong Factors

Even though LEC, Inc.'s (TSE:7874) recent earnings release was robust, the market didn't seem to notice. Our analysis suggests that investors might be missing some promising details.

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The Impact Of Unusual Items On Profit

Importantly, our data indicates that LEC's profit was reduced by JP¥677m, due to unusual items, over the last year. While deductions due to unusual items are disappointing in the first instance, there is a silver lining. When we analysed the vast majority of listed companies worldwide, we found that significant unusual items are often not repeated. And, after all, that's exactly what the accounting terminology implies. Assuming those unusual expenses don't come up again, we'd therefore expect LEC to produce a higher profit next year, all else being equal.

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

Our Take On LEC's Profit Performance

Because unusual items detracted from LEC'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 LEC's statutory profit actually understates its earnings potential! And on top of that, its earnings per share have grown at 10% per year 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. With this in mind, we wouldn't consider investing in a stock unless we had a thorough understanding of the risks. For example - LEC has 1 warning sign we think you should be aware of.

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