Oomitsu's (TSE:3160) Conservative Accounting Might Explain Soft Earnings

The market for Oomitsu Co., Ltd.'s (TSE:3160) shares didn't move much after it posted weak earnings recently. Our analysis suggests that while the profits are soft, the foundations of the business are strong.

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The Impact Of Unusual Items On Profit

Importantly, our data indicates that Oomitsu's profit was reduced by JP¥149m, 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 that's hardly a surprise given these line items are considered unusual. Assuming those unusual expenses don't come up again, we'd therefore expect Oomitsu 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 Oomitsu.

Our Take On Oomitsu's Profit Performance

Unusual items (expenses) detracted from Oomitsu's earnings over the last year, but we might see an improvement next year. Because of this, we think Oomitsu's earnings potential is at least as good as it seems, and maybe even better! And on top of that, its earnings per share have grown at an extremely impressive rate over the last three years. At the end of the day, it's essential to consider more than just the factors above, if you want to understand the company properly. So while earnings quality is important, it's equally important to consider the risks facing Oomitsu at this point in time. To that end, you should learn about the 4 warning signs we've spotted with Oomitsu (including 1 which is concerning).

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