We Think That There Are Issues Underlying Kato Sangyo's (TSE:9869) Earnings

Kato Sangyo Co., Ltd.'s (TSE:9869) robust earnings report didn't manage to move the market for its stock. Our analysis suggests that this might be because shareholders have noticed some concerning underlying factors.

See our latest analysis for Kato Sangyo

The Impact Of Unusual Items On Profit

Importantly, our data indicates that Kato Sangyo's profit received a boost of JP¥4.6b 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. And, after all, that's exactly what the accounting terminology implies. We can see that Kato Sangyo's positive unusual items were quite significant relative to its profit in the year to September 2024. As a result, we can surmise that the unusual items are making its statutory profit significantly stronger than it would otherwise be.

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

Our Take On Kato Sangyo's Profit Performance

As we discussed above, we think the significant positive unusual item makes Kato Sangyo's earnings a poor guide to its underlying profitability. As a result, we think it may well be the case that Kato Sangyo's underlying earnings power is lower 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 Kato Sangyo at this point in time. In terms of investment risks, we've identified 1 warning sign with Kato Sangyo, 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 Kato Sangyo's profit. But there are plenty of other ways to inform your opinion of a company. 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.