Investors Shouldn't Be Too Comfortable With Sato Foods' (TSE:2923) Earnings

Sato Foods Co., Ltd.'s (TSE:2923) robust earnings report didn't manage to move the market for its stock. Our analysis suggests that shareholders have noticed something concerning in the numbers.

View our latest analysis for Sato Foods

The Impact Of Unusual Items On Profit

To properly understand Sato Foods' profit results, we need to consider the JP¥192m 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. When we crunched the numbers on thousands of publicly listed companies, we found that a boost from unusual items in a given year is often not repeated the next year. And that's as you'd expect, given these boosts are described as 'unusual'. 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 Sato Foods.

Our Take On Sato Foods' Profit Performance

Arguably, Sato Foods' statutory earnings have been distorted by unusual items boosting profit. Because of this, we think that it may be that Sato Foods' statutory profits are better than its underlying earnings power. But at least holders can take some solace from the 54% per annum growth in EPS for the last three. 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'd like to know more about Sato Foods as a business, it's important to be aware of any risks it's facing. Every company has risks, and we've spotted 1 warning sign for Sato Foods you should know about.

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

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com